April 5, 2013

The math of a jobless 'recovery'

The labor force participation rate in the United States has hit it's lowest level since 1979.  1979 was a bad year and since then there have been a few recessions as well.  Yet today we have word that things are a lot worse in the labor market than any time in the last 34 years.  So is this a jobless recovery?  Can we even call it a recovery?  Let's go back to basics to find the answer.

First, the bad news.
Things just keep getting worse for the American worker, and by implication US economy, where as we have shown many times before, it pays just as well to sit back and collect disability and various welfare and entitlement checks, than to work .The best manifestation of this: the number of people not in the labor force which in March soared by a massive 663,000 to a record 90 million Americans who are no longer even looking for work. This was the biggest monthly increase in people dropping out of the labor force since January 2012, when the BLS did its census recast of the labor numbers. And even worse, the labor force participation rate plunged from an already abysmal 63.5% to 63.3% - the lowest since 1979! But at least it helped with the now painfully grotesque propaganda that the US unemployment rate is "improving."
Next, what exactly is the definition of the labor force participation rate? Via Investopedia (emphasis added);
A measure of the active portion of an economy's labor force. The participation rate refers to the number of people who are either employed or are actively looking for work. The number of people who are no longer actively searching for work would not be included in the participation rate. During an economic recession, many workers often get discouraged and stop looking for employment, as a result, the participation rate decreases.
The rate represents another view of the strength of the economy that offers a similar but distinct perspective from the unemployment rate.  It does not consider retirees as part of the labor force, so people retiring do not skew the statistic - they are simply removed from the calculation.  Both from the numerator and denominator of the following simple equation:
Number of employed people / [ number of employed people + working age people 16-64 looking for work].
But taking them out of both actually can change the rate.  Let's say that there are 75 employed people and 25 people looking for work.  In the above equation the rate would be 75 / [75 + 25] or 75/100 or 75%.  If 10 people who are employed retire then the number becomes 65/[65+25] or 65/90 or 72.2% so the rate has fallen.  The result is different if the people retiring are those looking for work or a mix of those working and those looking.

 If those 10 who left were all people who were looking for work the participation rate would actually go up. The equation would become 75/[75+15] or 75/90 or 83.3%, so clearly that's not happening here.

What if the mix were 5 workers and 5 seekers who left?  The numbers would be 70/[70+20] or 70/90 or 77.8%, again it would go up.  So the mix of retirees can have an effect.

And we know people retiring is a large factor in the economy because a large population of baby boomers hitting retirement age.  But the most likely scenario is that the retirees are in a ratio close to the general existing ration of workers to those seeking work as the general population.  Perhaps a little more employed, but I haven't seen any statistics on that.  But there's another consideration.  The total size of the labor force.

Giving the rising population of the United States, the total size of the labor force must be growing, right?  Well, maybe not.  In May of last year in the Economist, there was this interesting tidbit;
True, the slide in the unemployment rate – a full percentage point since September – owes mostly to rising employment (as measured by the household survey). But the decline in unemployment has been helped by the failure of the labour force to grow more quickly. After growing for several months, it shrank in April. While it has fluctuated considerably, the labour force is only slightly larger now than in December, 2007, when the recession began. Yet in January, 2008, the Congressional Budget Office reckoned it would be some 5m larger by now, or 159.5m (see chart). What happened to those 5m people? Why aren't they showing up as unemployed? Some are discouraged workers or other people who want to work but aren't counted as unemployed; but I reckon they account for only one third of the missing 5m.

So what about the others? Is it early retirement? Disability? Returning to school? Illegal immigrants returning home (or failing to enter the country in the first place)? Or were they never there to start with - the labour force simply isn't growing as quickly as we thought it should, for demographic or other reasons? Whichever it is, it is a troubling sign that our economic potential could be a lot lower than we thought just a few years ago. And that's the real bad news from today's report
In other words the number of people entering into the calculation is lower than expected.  As the Economist article points out with people leaving, identifying people and categorizing them is difficult when they are leaving the work force, but it's pretty much impossible when they don't even show up as expected.

So where does that leave us?  Liberals will certainly go into spin mode and start arguing points like this:
Many are quick to attribute this falling rate due to workers leaving the labor force because they're so discouraged by the poor job market.

But this is only a small part of the story.

UBS's Drew Matus argues that this dropping participation rate is largely due to shifting American population dynamics. Specifically, we're running out of workers.
It's just not that simple. What is pretty straight forward is a relatively flat recovery in the rate of unemployment with a relatively flat labor force size. That does not suggest a huge hole in employment caused by jobs going unfilled. Where are the job ads? Where is the rising wage compensation to attract labor? It's simple supply and demand - not enough workers means employers have to compete for them and wages will rise dramatically.  That's just not happening.

There's a flat labor force stuck with high unemployment.  This is indeed 1979 all over again, but without an obvious Ronald Reagan on the horizon.  The recovery is clearly jobless.  Four years into an Obama administration and the buck stops nowhere.

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