Saturday, January 7, 2012
Upon Further Review: The 01/06/2012 Jobs Report and the Rise of the Discouraged Worker
Has the employment/unemployment picture become brighter? Has the unemployment rate fallen? Are current unemployment rate statistics reliable measurements?
The problem [illusion] with the current unemployment rate statistic lies in the labor participation rate. That is, the labor participation rate is at a historical low of 64%. That is to say, in recent job reports more and more discouraged workers, workers giving up on job seeking and hence leaving the work force all together, has increased. Specifically, 120,000 more people left the work force in the last jobs report and 50,000 more left the work force in the current jobs report of 01/06/2012. Hence in the last two jobs reports 170,000 people have left the work force. (1) (2)
Why is the labor participation rate causing an illusion? Imagine all things being equal but reducing the size of the total labor force:
Formula for the unemployment rate is:
Unemployment Rate = Number of Unemployed / Total Labor Force * 100
Hence as the denominator shrinks, as people become discouraged and leave the work force, even if the number unemployed remains constant, the unemployment rate falls as the total labor force shrinks. Moreover, an absolute standing army of millions of discouraged workers exists and this standing army is receiving more recruits. That is, the rise of the discouraged worker. (3)
If the economy is growing at a robust pace, then the army of discouraged workers are encouraged to reenter the work force. That is, a robust economy attracts workers. Hence the unemployment rate should rise as the economy improves as the standing army of discouraged workers reenter the work force causing the denominator, in the formula above, to be flooded by new participants.
The robust economy, counterintuitively, would display a rising unemployment rate, for an extended period of time, until which time the newly repatriated workers [the standing army of discouraged workers] are absorbed into the employed.
UPDATE: CNBC, Is Strong Jobs Data Sending a 'Sell' Signal?
UPDATE TWO: CNBC: Santelli: Jobless Rate Not as Good As It Looks
(1) What is the Labor Force Participation Rate? About Economics.
(2) Databases, Tables & Calculators by Subject, BLS, 01/06/2011
(3) 8.5% Unemployment: Why 2011's Best Jobs Report Still Isn't Good Enough, The Atlantic.