Real Jobless Rate 11.8% Excluding Labor Force Exodus
Census employees "faked" employment survey data, possibly accounting for an unemployment drop just before the 2012 election, claims the New York Post.
But even taking the government figures at face value, the jobless rate is radically distorted — and by far more than a short-term drop of a few tenths of a percentage point.
The unemployment rate was 7.3% as of October, still high but essentially at the lowest level since the end of 2008. However, almost all of the apparent improvement has come from a historic exodus from the labor force.
Excluding this dramatic shift, the jobless rate would be 11.8%, 4.5 percentage points above the official figure and virtually unchanged from peak levels.
The unemployment rate reflects the share of people who are in the workforce but do not have jobs. When people stop looking for work and leave the labor force, they reduce the unemployment rate — even if the number of people working hasn't risen.
This Time It's Different
During recessions and the early stages of a recovery, discouraged people leave the workforce. That's why economists say the unemployment rate at these times typically masks how bad the job market really is.
What's different in the past several years is the size and duration of the distortion.
When the economy fell into recession in December 2007, the jobless rate was 5% and the labor force participation rate was 66%. As job losses surged, unemployment doubled to 10% in October 2009, a few months after the recession officially ended. The jobless rate slowly began to edge down, but held at 9% or above for nearly two years, and above 8% for nearly three years.
But the drop largely reflected job market weakness rather than strength. During this time, labor force participation steadily fell. In October 2009, when official unemployment peaked, participation was 65%. A year later it was 64.4%. Now, more than four years into the expansion, it's 62.8%, the lowest in 35 years.
No Participation Trophy
Why has labor force participation fallen so sharply? It's partly a secular trend as aging baby boomers retire. But the bulk of the shift reflects the long, painful recession and subsequent anemic economic recovery. Millions of Americans have been out of work for months or years. Many have simply dropped out, and job growth has been too meager to draw them back in. Young adults are returning to school or staying there.
If labor participation had held constant at 66%, the jobless rate would have been 11.4% in October 2009. And this rate never really came down. Last month it spiked to 11.8%, just below the cycle high. That's 4.5 percentage points over the official jobless rate.
The October jump was due to a sharp fall in both the labor force and employment in the household survey, perhaps affected by the government shutdown. But September's rate was 11.2%.
Now compare the current trend to the 2001 recession and the sluggish economic recovery that initially followed it.
When the slump started in March 2001, the jobless rate was 4.3% and the participation rate was at 67.2%, just below 2000's dot-com bubble peak. Official joblessness topped out at 6.3% in June 2003. The labor force rate fell for another year, to 65.8%.
But even with a steady participation rate, the jobless rate never topped 7.6% in the summer of 2003. And the gap over the official unemployment rate never surpassed 2 percentage points, less than half of the distortion now.
Seventy months after the recession began — the same point as now — the official jobless rate was 4.6% and the "true" jobless rate was just 5.8%.
The 2001 recession was relatively mild. How does the latest cycle compare to the sharp 1981-82 recession?
In July 1981, the jobless rate was 7.2%. By the end of 1982, the official rate soared to 10.8%. But in this case, the labor force participation rate actually rose, as baby boomers — including more and more women — flooded the job market. So the official jobless rate overstated labor market weakness. By 1984, this gap widened significantly as the labor market absorbed additional workers.
By May 1985 — 70 months from the recession's start — the jobless rate was 6.3%. But if the participation rate had held steady, unemployment would have been just 3.5%, or 2.8 percentage points below the official figure.
These steady-participation rates oversimplify the situation. There's not a normal labor force participation rate. A larger workforce could reflect higher wages and employment, or could mean more people with valuable skills.
Nonetheless, the yawning gap between the official rate and steady-participation jobless rate shows that headline figures are historically distorted.
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