Economics for the 99%: Unemployment Falling in the United States? What a load of B(L)S

May 2, 2013
theRealNewsBanner

By John Weeks

Unemployed at a soup kitchen, 1931. People in line to register as unemployed, 2009.

If like many middle class people you get your (mis)information from the Newspaper of Record (aka New York Times), in mid-March you arrested by the headline, “Jobless rate at 4-year Low as US hiring gains steam”. The first sentence of the article told you the good news that “The economy picked up speed in February, creating jobs at a pace that would substantially lower the unemployment rate” (8 March 2013, article by Nelson D. Schwartz and Binyamin Appelbaum). According to the authors the “impressive” employment gains are threatened by the infamous cuts of the federal budget resulting from “sequestration” (which sounds a bit kinky to my ear).

The authors were obviously correct to point to budget cuts by any means as a threat to economic recovery. Less obviously correct is the assertion of impressive job growth. A bit of background investigation allows an assessment of whether the unemployment decline reflects an economy belching steam as it gathers pace or if those burps arise from economic indigestion associated with continued stagnation.

In some European countries, for example the United Kingdom, unemployment is measured by the number of people applying and receiving unemployment compensation (note, not “benefits”, but “compensation” funded by payroll taxes). This undercounts the unemployed, most obviously because everyone is not covered by unemployment compensation programs.

In the United States we estimate unemployment from surveys, which have the potential for greater accuracy if properly designed. The organization in charge of collecting and reporting labor force information is the Bureau of Labor Statistics (BLS) of the Department of Labor. To my knowledge no one has suggested that the statisticians at the BLS are anything other than competent, dedicated professionals. The problem lies elsewhere, as we shall see.

The chart below shows unemployment rates for over five decades, including the most recent statistic, for the first quarter of this year. It also shows the proportion of Americans in poverty, through 2011. Deep statistical knowledge is not necessary to infer the close relationship between the two. When unemployment rises, poverty rises. On average over the five decades when unemployment went up by a percentage point, poverty increased by 1½ percentage points.

The chart is not a great advertisement for capitalism even at its best. Since 1973 when poverty reached its lowest percentage of the US population (11.1), it averaged more than 13 percent with no tendency to decline. As for unemployment, the forty year average since the early 1970s has been well over six percent. Worse still, poverty and employment over the last forty years has reached levels not seen since the 1960s for the former, and not since the Reagan recession of 1982-83 for the latter.

But, wait – things are improving. The NYT tells us that job creation is steaming along, with unemployment falling.

 

Civilian unemployment rate and the proportion of people in poverty, United States, 1960-2013

Source: Bureau of Labor Statistics via the Economic Reports of the President. The last poverty estimate is 2011.

 

Actually, no. Recall that the BLS will only count you as unemployed if you do not have job, plus you must engage in an active search for one (“unemployed and looking for work”). If you say, I have no job and I am not looking for one, then you are not counted. You do not enter the unemployment rate, either in the top of the fraction (the unemployed count) or the bottom (the labor force count). When someone stops looking for work the unemployment rate falls for two reasons – the unemployed count goes down and so does the labor force count.

The next chart tells this story, measuring in millions the change in the unemployment count and labor force count since the first three months of 2008 (2008Q1). At the end of 2009 the number of people “unemployed and looking for work” grew to 7.8 million more than at the beginning of 2008. Over the same 21 months the number of people “unemployed and not looking for work” increased by 4.3 million.

 

The change in the number of people counted as unemployed , and those no longer in the labor force (compared to 2008Q1, millions)

Source: BLS via the Economic Report of the President 2013.

Comparing to 2008 after rising, since the end of 2009 the increase in the unemployment count declined continuously, from 7.8 million to 4.4 million now (see chart above). Great work, Barack, keep it up. But, what about the increase of 10.5 million in the number of people that dropped out of the labor force (unemployed and not looking for work)? Why would the US labor force decline by over ten million when at the end of 2012 the population aged 19-65 was over six million greater than four years before?

Over the four years, 2008-2012, six million more people of working age and ten million fewer in the labor force – how do we account for that? Some of the six million went into full time education, others retired early and some stopped work to raise families. But, ten million of them? To say the least, not very likely.

This apparent numerical disappearance of working Americans has a simple explanation. Unable to find a job after months, even years of trying, people gave it up, hoping to return to job searching when times improve. These people are as just as unemployed as those counted by the BLS, with the only difference being that they gave up a hopeless search for a job.

But, from the BLS point of view, when you give up on finding a job, you are out of the labor force. Subtracting discouraged workers from both the unemployment count and the labor force count is an effective way to bring down the unemployment rate as the next chart shows. The ten percent BLS unemployment rate at the beginning of 2010 falls to 7.7 at the beginning of 2013.

What if we include discouraged workers as unemployed and in the labor force instead of using BLS measures? Including them will still under-estimate of the discouraged worker unemployment because we know that the working age people actually increased by almost six million from 2008 to 2013. But it is a step towards a more accurate estimate of the unemployed. In the chart below I compare the BLS unemployment rate with the more accurate measure that estimates the labor force dropouts, discouraged workers.

The comparison suggests that perhaps we should curb our enthusiasm about the “fall in unemployment”. While the BLS measure slowly edges downwards after the beginning of 2010, the more accurate unemployment estimate relentlessly rises, from 12.3 percent at the beginning of 2010 to 13.6 percent in the first quarter of this year.

Unemployment according to the Bureau of Labour Statistics and adjusted for discouraged workers, 2008-2013

To put the case simply, by the BLS measure today unemployment is lower than when Mr Obama became president, albeit by a modest 600,000. Even this pathetic decline is nonsense. By any measure that corresponds to the reality of unemployment we have had an increase of over eight million of people without work and wanting work than in January 2009. In a phrase, don’t believe the B(L)S figures you read in the New York Times.

Related Bios

John Weeks

John Weeks is Professor Emeritus and Senior Researcher at the Centre for Development Policy and Research, and Research on Money and Finance Group at the School of Oriental & African Studies at the University of London.