“There are lies, damn lies and statistics.” From an analysis perspective, the recent unemployment numbers have been difficult to explain because they do not jibe with the results of the labor participation rate. With help from an analyst at the Boston Federal Reserve, I will explain below why the current unemployment number is too low, why the labor participation rate is right and why the employment situation is not as good as President Bush and his band of yapping right-wing idiots say it is.
First, let me provide some basic definitions, courtesy of the Bureau of Labor Statistics.
The BLS derives the unemployment rate from a sample of payroll records from all 50 state employment agencies. People are classified as unemployed if they meet all of the following criteria: “They had no employment during the reference week; they were available for work at that time; and they made specific efforts to find employment sometime during the 4-week period ending with the reference week.”
The bold-face type makes an important distinction: if someone did not search for work in the last month, the unemployment rate does not count them at all.
The labor force participation rate is the labor force as a percent of the population. The BLS takes the total population of the US and figures out what percentage of the total population is the “work” force. Then, they compute the “labor participation rate” which tells us what percentage of the US workforce is in fact actually working.
The Boston Fed Study uses the labor participation rate as the basis for analysis of the current employment situation.
The Study breaks the workforce down into sex and age group categories – for example, men age 16-17, men age 18 – 19 and so on. In total they have 14 different groups. There are 7 for each sex. In addition, the study breaks down each sex into the following age groups: 16-17, 18-19, 20-24, 25-34, 35-44, 45-55 and 55+. It might help at this point to either go to the study at the link below or draw out columns of a sheet of paper.
The study looks at each group’s labor participation rate in March 2001 and compares it to each group’s participation rate from November 2004 – February 2005. March 2001 was the final month before the last recession began. The percentage from November 2004–February 2005 provides as example of how each group is doing in the current cycle.
Here are the basic results. men and women over 55+ are the only group that is participating at a higher participation rate in November 2004 – February 2005 compared to March 2001. All other age groups are participating at a lower rate, particularly women. This drop in participation is most pronounced in both sexes teenage and early 20s categories. The report states it thusly:
“What leaps out … is the below-average recovery of participation in the current business cycle to date. The depth of the shortfall is most pronounced among teens and for women of all ages.”
Here is the report’s kicker. If all of the groups returned to their usual labor participation rate, the labor force would increase by 1.6 million people. Because these people are not in the workforce, the 5.4% unemployment rate for November 2004 – February 2005 is too low and should be revised upwards by 1.1%. This would make the unemployment rate at the beginning of the year 6.5%.
So, how do I prove all this statistical mumbo jumbo? Simple. Economists consider 5% unemployment to be full employment. This assumes that 5% of people are either looking for work, or quit a job to look for work, or were laid off etc….. Therefore, at 5% unemployment, we should be getting wage increases because it is harder for businesses to find employees. However, according to the BLS inflation adjusted wages actually decreased .31% in 2004. If there was a tight supply of labor, this number should have increased.
In short, game, set and match to the Boston Fed’s analysis.