Thursday, December 12, 2013

Worst-case Unemployment

From Philip Greenspun's Weblog:
Unemployment rate adjusted for labor force participation

Illustrating the magic of choosing one’s statistic carefully, today’s New York Times front page carries a story about how the jobless rate has fallen to a five-year low of 7%. Investor’s Business Daily, however, calculates unemployment at nearly a modern-day high of roughly 12% by holding labor force participation constant at the 2007 level (66% of working-age adults actually working). See “Labor Force Exodus Hides Nearly 40% of Hiring Shortfall”.

Well I ran into this the other day at John Taylor's, and here it is again today.

I have to look at the numbers for myself. What does the excerpt give me? The "labor force participation" rate, and "working-age adults".

Question: What is the Labor Force Participation Rate?

Answer: 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

Typically "working-age persons" is defined as people between the ages of 16-64. People in those age groups who are not counted as participating in the labor force are typically students, homemakers, and persons under the age of 64 who are retired. In the United States the labor force participation rate is usually around 67-68%.

Okay, if we have the labor participation rate

Graph #1: Labor Force Participation Rate
then we know (for example) that in 2007, about 66% of working-age persons were either employed or looking for a job. And today, about 63% are either employed or looking.

And if we have working age population for the 2007-2013 period

Graph #2: Working Age Population, 2007-2013
then we can see the working-age population increased from about 231 million to about 246 million during that period.

So we can estimate (crudely) that in 2007, about 66% of 231 million people were either working or looking for work. That's about 152.5 million people, working or looking.

And in 2013, about 63% of 246 million people were ditto. That's 155 million people.

If the participation rate didn't fall from 66% to 63%, in 2013 we'd be looking at 66% of 246 million, or about 162.4 million people. If the labor force participation rate remained at 66% -- an unreasonable proposition, I think, if you judge by Graph #1 -- we'd be looking at 162.4 million instead of 155 million people in the labor force in 2013.

The number of people working being what it is in 2013, the number *not* working would be several millions more, if we use the 162.4 number. So the unemployment rate would be higher. That's the scam they're running with this line of argument.

Now if we have the unemployment rate for 2007-2013

Graph #3: The Unemployment Rate, 2007-2013
we can say unemployment was about 4.5% in 2007, and is now about 7%.

If 4.5% of the labor force was unemployed in 2007, then 95.5% was employed.

The labor force in 2007 was 152.5 million. 95.5% of 152.5 million is 145.6 million. So in 2007, 145.6 million people were working.

If we have 7% unemployment today, then we have 93% employment.

The labor force now is 155 million people. 93% of 155 million is 144.15, so today we would say 144.15 million people are working.

Now, if the labor force participation rate had stayed at the 66% level, the labor force would be 162.4 million people. If 144.15 million are working, then the employment rate is 88.76%, and the unemployment rate is 11.24%.

(Off topic, but this is the second weak spot in the "unemployment is worse than we think" argument. They do all the calculations that I'm doing, and I'm sure they do them better. (This is my first look at these figures, after all.) But they justify all their hard work on the assumption that if all the people who left the workforce in the last five years started looking for work again, nothing else would change. You know: ceteris paribus.)

(Oh -- No, I have no idea what would change. But then, it is not my assumption.)

Okay, Investor's Business Daily came up with 12%. I got eleven and a quarter. That's close, considering how crude my estimate is. But wait -- What did John Taylor have?

Graph #4: Actual and Hypothetical Unemployment
Eleven, eleven and a half, right in there.


The Arthurian said...

David Andolfatto considers this same topic today.

BTW, I will be on this topic for several days.

Jazzbumpa said...

Well, I retired in 2008, and I'm certainly not looking for work.

It seems that IBD is assuming that I am though, along with the cohort of baby boomers who have retired along with me and since.

Am i reading hie right?

I went out at 62, but certainly would have been retired by now, in any case, along with another two or so years worth of my near-contemporaries.


The Arthurian said...

One of the things I was reading suggested that it's mostly new entrants into the labor force that are not entering, that is most of the shortfall. Staying in school, or going to college, or joining gangs maybe.

I ran across that explanation late, and it didn't make it into the post.

jim said...

Hi Art,
This paper has a pretty thorough analysis of the recent declines in Labor force participation:

Have you noticed the close similarity between Labor force participation rate and M2 Money Velocity since the early 90's?