Friday, June 1, 2012

How bad is the unemployment rate?

Labor market numbers reported today by the Bureau of Labor Statistics are pretty bad. Only 69,000 jobs created last month, when we would need something more like 400,000 to be in a healthy recovery. But they are actually worse than it looks like, if that is possible. The key to understand why numbers are too rosy is the so-called participation rate. The labor force participation rate is the percentage of working-age persons in an economy who are employed or are unemployed but looking for a job, shown in the graph below. At the peak, from 1997 to 2000 the participation rate was 67.1%, but fell to 63.8% now.
If the number of employed and unemployed people that are looking for a job drops the participation rate drops too. If a few of the employed workers become unemployed, but  are still looking for a job, the participation rate does not change. But if the unemployed stop searching for a job they drop out of the labor force and the participation rate falls. So you see what is going on. More people are, since the prick of the dot-com bubble in 2000, leaving the labor force. The graph below shows the rate of unemployment and the adjusted rate of unemployment if the labor force participation rate had remained constant at 67.1%.

Instead of the current 8.2% rate of unemployment, the adjusted level would be 12.7%. It is also worth noticing that even with the housing bubble the labor market was not very strong during the Bush years, with the unemployment rate  never going below 6%.


  1. Are US entering a demographic transition, or is the drop in the participation rate explained by the crisis and the persistent unemployment?

    1. The fall in the participation rate is basically a result of too very poor recoveries, the Bush one after 2001, and the Obama one after 2007-8. But even if you had a demographic component what that means is that with a lower participation rate, to keep the labor market tighter you need even more expansionist macro policies.

  2. You should also look at the ration of (Not in Labor Force)/(Civilian Labor Force) to get a much better unemployment adjustment level. My estimate from that is that U-6 has been flat to slightly increasing from 2008 to today, and should be currently close to ~24%


  3. Replies
    1. Here is a link to my modified U-6 graph


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