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February Jobs Report: Upon Further Review

The Employment Situation Report – 02/2012 released Friday 03/09/2012 by the Bureau of Labor Statistics showed an unchanged unemployment rate as measured by U3 also known as “headline unemployment”. The rate remained at 8.3%. (1)

The report shows a 476,000 increase in the civilian labor force of which all gained employment hence the numerator and denominator of the unemployment formula increased equally, hence the U3 rate remains at 8.3%.

If one drills down into the data and applies “inflow rate to unemployment” and “outflow rate from unemployment” you find four items of interest:

(1) more people are staying in the same job for much longer periods,

(2) those leaving a current job can’t find a new job (few find a new job),

(3) those first time job seekers [high school and college graduates and those that have previous left the work force now returning to the work force] can’t find a job,

(3a) number 2 and 3 above is a 25 week average job seeking period [which is double the double dip recession of the early 1980's] which means 25 weeks is the average period to find a job -or- leave the work force (give up trying to find a job) i.e. become the discourage worker,

(4) job “trade up” aka “churn rate”, where a worker takes a higher paying/more opportunity job is very low. This situation, trade-up, is viewed as a better allocation of human resources aka more efficient allocation of human recourses…..and it is very, very low.

What does that mean?  It means two things:

(1) one is viewing a stagnant labor force, people don’t leave their current jobs, few can find new jobs, and the efficient allocation of human resources is very low,

(2) the current recession is not so much about losing one's job [although that did occur at the beginning], it’s much more about those that did/do loss a job not being able to find a new job and those first time job seekers [demographics yielding new labor participants] and or returning to the labor force job seekers not being able to find a job.

Drilling further down into the data and historical data, one finds this trend:

(1)    01/2009 there was somewhere in the vicinity of 142,000,000 employed. (2)



(2)    Total employment peaked in late 2007 at 146.5 million.(3)

(3)    Total employment as of Feb. 2012 Jobs Report were 142, 000, 0000.

(4)    That is, between 01/2009 and 02/2012 there was no change in total employment. (4)



Considering the trend of total employed from the discussion above one might want to consider the labor force participation rate in conjunction with total employment. Here is a definition of the labor force particpation rate:

http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=labor+force+participation+rate

Here is historical data on the labor force participation rate [note the bottom of the page you can click to go back into history]:

http://ycharts.com/indicators/labor_force_participation_rate/historical_data

Hence combining/contrasting total employed with labor force participation rates one finds:

(1)    01/2009 employed was 142 million with a labor participation rate of 65.7%

(2)    02/2012 employed was 142 million with a labor participation rate of 63.9%

(3)    Looking at the recent peak in employed of 146.5 million in late 2007, the participation rate then was roughly 65.8%.


Implication and Summary


One then must ask the question of: is the employment/unemployment picture improving, stagnant or actually worse? If total employed is the same in 02/2012 as 01/2009 has improvement occurred? If labor participation rates have fallen between 01/2009 and 02/2012 is this an improvement trend? If the labor force is stagnant is this an improving picture?

Notes:

(1)    http://www.bls.gov/news.release/pdf/empsit.pdf

(2)    http://gregor.us/economics/total-employment-in-the-us-falls-again/

(3)    Ibid.

(4)    Employment Situation Summary Table A. Household data, seasonally adjusted

http://www.bls.gov/news.release/empsit.a.htm

The Labor Market “Churn Rate”: The Seen and the Unseen.

“Job churning—the voluntary movement of workers from one job to another similar job—is an important but seldom noted factor in the labor market. Churning creates badly needed job opportunities when growth slows and unemployment rises.” (1)

In labor economics the observation above is referred to as the “churn rate”.  The churn rate is the measurement of the voluntary termination by the worker/employee (resignation) and re-employment of the same worker/employee by an alternate firm at a higher level of compensation. The higher level of compensation is considered to be an indicator of a better allocation of labor resources.

Why examine the labor market “churn rate”? One must endeavor to go beyond the seen, to the unseen. Recent improvements in the headline unemployment figures (the U3 measurement) and the decline in jobless claims are put forth by many pundits, talking heads, and media types as an indicator of a much improved economy and hence a much improved employment picture. However, another school of thought is that jobless claims is an overrated indicator especially with historically low labor participation rates, 5.4 million discouraged worker, and an SGS alternative unemployment rate standing at 22.5%. (2) (3) (4) (5)

　

FIGURES on employment tend to encourage a black-or-white view of an economy. Either conditions are worsening and firms are shedding workers, as they did by the hundreds of thousands in 2008 and 2009, or times are improving and businesses are creating new jobs. Spirits leapt on February 3rd on news that America’s private businesses boosted their payrolls by 257,000 jobs in January, capping the country’s best 12-month employment performance in the private sector for over five years. But the headline figures represent just the tip of a large labour-market iceberg. Data provided by the relatively new Jobs Openings and Labour Turnover Survey (JOLTS) illuminate these depths.

Even in the darkest of days, labour markets remain busy. Growing firms hire to expand and even shrinking businesses seek out workers to fill important vacant positions. In December 2008, for instance, overall American employment dropped by nearly 700,000 jobs. Yet in that month more workers—over 4.1m in total—were hired into new positions than in December of last year, when net payrolls grew by 203,000. During a relatively placid economic period like the mid-2000s, about 65% of all hiring is associated with what economists have dubbed “churn”—the job-to-job movement of workers through the labour force, which neither adds to nor subtracts from total employment. Of the 12m or so hires that occurred in a typical pre-recession quarter, some 8m came from firms luring workers away from other firms.

Churn is a mechanism by which labour markets reallocate workers towards more efficient ends. In the typical job-to-job move (that is, without any intervening stint of unemployment) an American worker can expect a rise in wages of over 8%. This gain represents, at least in part, an improvement in productivity. As workers obtain skills and find better job matches, their output and earnings rise. And as firms obtain ever more suitable labour, they can afford to pay higher wages. In this way, the churning of the labour market contributes to growth in the potential output of the economy. - The Economist, Go for the Churn, 02/11/2012


Link to the entire article appears below:

http://www.economist.com/node/21547224


Notes:

(1) http://www.incontext.indiana.edu/2009/jan-feb/article1.asp

(2) http://www.econlib.org/library/Bastiat/basEss1.html

(3) http://economics.about.com/od/unemploymentrate/f/labor_force.htm

(4) http://www.zerohedge.com/news/labor-force-participation-rate-drops-639-lowest-january-1984

(5) http://www.shadowstats.com/alternate_data/unemployment-charts

Current Labor Participation Rates: an indicator of an increase in labor participation rates within the subterranean economy?

The subterranean economy, in a nutshell, is non-reported work which means non-reported wages meaning zero tax revenue for state. The subterranean economy is as simple as the neighborhood kid mowing lawns for cash and as sophisticated as organized crime. Keep the subterranean economy in mind for a moment.

Within the study of labor economics is the phenomena of the discouraged worker. The discouraged worker is basically that worker that has given up looking for employment as they feel its fruitless given current employment opportunities. These same discouraged workers are attracted back into the labor force due to improving headline unemployment numbers. Hence discouraged workers can make a headline unemployment rate [unemployment measurement u3] look better than it actually is by leaving the work force and hence the total work force shrinks yet employed remains constant giving the phenomena of the unemployed number shrinking. Conversely, when the discouraged worker is attracted back to the labor force the unemployment rate flattens then increases as a flood of discouraged workers perceive employment opportunity therefore the work force expands In the short run, this expanded work force is not immediately employed hence headline unemployment rises.

Therefore labor participation rates change at the margin depending on how many discouraged workers enter or leave the work force. Today the labor participation rate is historically low. What if the decrease in labor participation rates is merely an indicator of an increase in labor participation rates within the subterranean economy?

Would the failure of, or speed by which the discouraged worker is attracted back to the labor force be a function of and/or an indicator that the “labor” is in fact engaged, albeit in the subterranean economy?

Many people consider the subterranean economy as some abstract and singularly organized crime type of underworld. Nay, nay. The subterranean economy is real and comes in many forms and many levels within those forms. That is to say, it’s a real economy with real dynamics. Further, much like the phenomena of welfare, leaving subterranean employment and entering the surface economy comes with a disincentive in the form of wages after tax (as in welfare, wages in the subterranean economy may exceed employment available in the surface economy, the wages thereof, wages that after tax are below the subterranean economy non-taxed wage, hence rationally staying in the subterranean, as in rationally stay on welfare becomes the choice when the person weighs total revenue after tax: subterranean wage or welfare receipt vs. taxable employed wage after tax).

If one sees a statistical failure of the discouraged worker to be attracted back to the labor force, would that be an indicator that the “labor” is in fact engaged albeit in the subterranean economy? If in fact labor is pervasively engaged in the subterranean economy, one would expect to have some level of rigidity at the margin regarding reentering the labor force and leaving a subterranean wage position (wage rationality mentioned above). Finally, if the subterranean wage position is vacated, and given the current army of discouraged workers numbering in the millions, does another discouraged worker merely fill the vacated subterranean position before entering the surface economy labor force (like a halfway house on the way to the surface economy participation) hence the population of the group "discouraged worker" falls slower than one would otherwise anticipate?

Notes:

(1)Measuring the Non-Observed Economy. http://www.oecd.org/dataoecd/9/20/1963116.pdf

(2)The "underground economy"and BLS statistical data.
http://www.bls.gov/opub/mlr/1984/01/art1exc.htm

(3) What is the Labor Force Participation Rate? http://economics.about.com/od/unemploymentrate/f/labor_force.htm

(4) Santelli: 1.2 Million Fall Out Of Labor Force As Participation Rate Hits 20-Year Low, Real Clear Politics. http://www.realclearpolitics.com/video/2012/02/03/santelli_12_million_fall_out_of_labor_force_as_participation_rate_hits_20-year_low.html










　

And About that Labor Participation Rate and The Supposed Headline Unemployment Rate

"CNBC's Rick Santelli: You know what I said at 8:30 Eastern? We want a million jobs an hour. That's what we want. What we got looked like a good report. I said, 'Let's get the calculator out,' and I did. And so did a boatload of my sources and big blogs that many people read like Zero Hedge. The labor force participation rate, if you look at non-seasonally adjusted, a fresh low going back to April of '83. If you look at seasonally adjusted, a fresh low participation rate going back to December of '81. What does that mean in English? Shrinkage. Shrinkage. 1.2 million people are now not considered unemployed anymore. They just have left the system. So, we need to concentrate on the internals, and eventually we want to watch the fixed income market to see if some of this sets in as people do their ciphering." - Real Clear Politics, 02/03/2012

"A month ago, we joked when we said that for Obama to get the unemployment rate to negative by election time, all he has to do is to crush the labor force participation rate to about 55%. Looks like the good folks at the BLS heard us: it appears that the people not in the labor force exploded by an unprecedented record 1.2 million. No, that's not a typo: 1.2 million people dropped out of the labor force in one month! So as the labor force increased from 153.9 million to 154.4 million, the non institutional population increased by 242.3 million meaning, those not in the labor force surged from 86.7 million to 87.9 million. Which means that the civilian labor force tumbled to a fresh 30 year low of 63.7% as the BLS is seriously planning on eliminating nearly half of the available labor pool from the unemployment calculation. As for the quality of jobs, as withholding taxes roll over Year over year, it can only mean that the US is replacing high paying FIRE jobs with low paying construction and manufacturing. So much for the improvement." -ZeroHedge, 02/03/2012

The entire articles, Real Clear Politics and ZeroHedge, appear in the links below. Be sure to note the charts in the ZeroHedge article:

http://www.realclearpolitics.com/video/2012/02/03/santelli_12_million_fall_out_of_labor_force_as_participation_rate_hits_20-year_low.html

http://www.zerohedge.com/news/record-12-million-people-fall-out-labor-force-one-month-labor-force-participation-rate-tumbles-

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?

http://video.cnbc.com/gallery/?video=3000066189


UPDATE TWO: CNBC:  Santelli: Jobless Rate Not as Good As It Looks

http://video.cnbc.com/gallery/?video=3000066200

　

　
Notes:

(1) What is the Labor Force Participation Rate? About Economics.



http://economics.about.com/od/unemploymentrate/f/labor_force.htm

　

(2) Databases, Tables & Calculators by Subject, BLS, 01/06/2011

http://data.bls.gov/timeseries/LNS11000000?output_view=net_1mth



(3) 8.5% Unemployment: Why 2011's Best Jobs Report Still Isn't Good Enough, The Atlantic.


http://www.theatlantic.com/business/archive/2012/01/85-unemployment-why-2011s-best-jobs-report-still-isnt-good-enough/250980/