The White House doubtlessly is happy that the unemployment rate has dropped to 8.5 percent, in part because the President is much more likely to get reelected if voters think the economy is heading in the right direction.
My political predictions have a mixed track record, so take this for what it’s worth, but I’ve been telling audiences for quite some time that Obama will definitely win reelection if the joblessness rate drops to 8 percent or below by next November.
But the latest drop in the unemployment is not unambiguous good new for the Obama Administration.
Before explaining why, let’s take a brief detour and look at how the unemployment rate is calculated. The key thing to understand is that there are two moving parts. First, the government estimates the number of unemployed people. That’s the obvious part of the calculation.
But in order to calculate the unemployment rate, the government has to estimate the size of the labor force. But this is not a simple number to calculate because many people who could work – such as women with young children, students, people approaching retirement age – sometimes decide that their time could be better spent doing other things.
So the government has to look at all the people who don’t have jobs and guess how many of them would like to work.
With this in mind, let’s look at the unemployment rate. The simple way to think about unemployment numbers is that the joblessness rate can rise or fall for good reasons and bad reasons.
If the unemployment rate drops because hundreds of thousands of jobs are being created each month, that’s obviously good news.
But if the jobless rate falls because the government estimates that lots of people have become discouraged and dropped out of the labor force, then that’s not good news.
In other words, sometimes the unemployment rate, by itself, doesn’t tell the full story.
That’s why one of the best statistics to look at is the employment-population ratio, which measures the number of people who have jobs and compares it to the number of people who could have jobs.
And by this measure, the Obama White House can’t be very happy. As illustrated in the chart, the job numbers have barely begun to recover.
This is a woefully under-reported piece of data. A few news outlets do mention the phenomenon of “discouraged workers” dropping out of the labor market, but only policy geeks like me seem to pay attention.
But the employment-population ratio does have real-world implications. The economy’s overall level of output (i.e., national income, gross domestic product, etc) depends on how many people are working. And that is what determines whether living standards are rising, falling, or stagnating.
This is why the Obama Administration can’t rely of a falling unemployment rate. As I’ve explained elsewhere, the American economy appears to have suffered a permanent loss of output in recent years.
So what does this mean, for those of you who care about political implications of economic statistics? The honest answer is that I have no idea. But since living standards are still stagnant, a falling joblessness rate won’t necessarily translate into a victory for the incumbent party.
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[…] Job creation has been extraordinarily weak. Indeed, the current 8.2 percent unemployment rate understates the bad news because it doesn’t capture all the people who have given up and dropped out of the labor force. […]
[…] Job creation has been extraordinarily weak. Indeed, the current 8.2 percent unemployment rate understates the bad news because it doesn’t capture all the people who have given up and dropped out of the labor force. […]
[…] Job creation has been extraordinarily weak. Indeed, the 8.2 percent unemployment rate actually masks the bad news since it doesn’t capture all the people who have given up and dropped out of the labor force. […]
[…] There are several key bits of data in the report, such as the unemployment rate, net job creation, and employment-population ratio. […]
[…] There are several key bits of data in the report, such as the unemployment rate, net job creation, and employment-population ratio. […]
Dan, I agree with your overall point and love your columns, but you’ve made a crucial misrepresentation thereby missing the point of what happens. As I explained in my December 16 column (http://www.jpattitude.com/111216.php), the Current Population Survey doesn’t count unemployed people. If it did, the unemployment rate would go UP not DOWN when the labor force shrinks. What the CPS does is count employed people and then subtract to arrive at the number of unemployed. The effect of that backwards machination is to make the entire reduction in the labor force come out of the unemployed total. And this didn’t really start AS A FRAUD until 2009, at the beginning of the Obama presidency: http://www.jpattitude.com/Unemployment%20column%2012-16-11%20Labor%20force%202005-2011.pdf
I disagree with you here Dan. If the unemployment rate drops to where you feel he will be reelected you are neglecting the fact that most people are ignorant uneducated voters, the numbers will be pumped up neglecting those who have given up hope of finding meaningful work but most important, now matter how stupid they are, the see the price of everything going up, gas, food, clothing, utilities. Obama has zero to run on, and the right candidate for the republicans with debating skills will kick his butt.
Weird how 8.5% is being pushed by the MSM as a good thing with Pres Obama, while Pres George Bush was demonized for a 4.3% unemployment rate, which didn’t climb very much even with 9/11.
This administration hasn’t done a good job with the economy, it should have recovered a couple of years back.
@derek, “and now has gone down for four months in a row. Basically the trend is positive since the summer.”
four months don’t constitute a trend, you need at least two quarters of a movement in one direction to call it a positive or negative trend. Remember the talks on the GDP decline and recovery during 2009? It’s the same thing, economists need at least 6 months of a positive direction before concluding that it actually is positive.
The unemployment rate data (http://data.bls.gov/timeseries/lns14000000) shows only inconsistency in the trend, just like the E-P ratio. But they both clearly suggest that the situation is not good.
[…] trumpeting the 200,000 figure, ignoring the larger number who dropped out of the labor force— essentially eliminating any real growth. There has been no progress on unemployment in two years’ […]
The unemployment rate has shown the same type of variability — it went down in early 2010, then up, then down in early 2011, then back up in the summer, and now has gone down for four months in a row. Basically the trend is positive since the summer.
@derek, but the problem is that the rate has been circulating around 58.5 since september 2009. Every once in a while it goes up by 0.2 and then back down by 0.1 or 0.2 (look at the table below the graph on the link I posted and you’ll see what I mean)
I’m sorry but there is no way I can call that a positive trend.
Connecticut Unemployment call centers for 1st. filers will be opened
tomorrow (Saturday)due to the large numbers of laid off seasonal worker.
Move along——-nothing to see here
Vuk: That does show the rate has improved slightly since last December. And since the numbers are seasonally adjusted, you should be able to compare month-to-month. And okay it doesn’t show an improvement since November, but there’s been an uptick since the summer. It doesn’t look like people are dropping out of the labor force, it looks like people are getting jobs. Are wayyyy too many people still without jobs? I think everyone would agree that they are.
@derek
here’s the seasonally adjusted data from the BLS: http://data.bls.gov/timeseries/LNS12300000
compare it…to be honest, I see no change from last December
The reported number is less important than individual perceptions of the economy and state of job growth. Just the notion that people who are receiving extended unemployment benefits are not counted, undermines the credibility of the base unemployment number.
Dan: I believe you’re badly mistaken here.
The government does not “look at all the people who don’t have jobs and guess how many of them would like to work.” It surveys 60,000 households monthly as part of the Current Population Survey and asks them questions. If they have looked for work within the past four weeks, they are considered unemployed. Folks that say they want a job, have looked within the past year but not in the past four weeks are considered “discouraged workers.”
The number of discouraged workers dropped to 945,000 in today’s release of data — down by 373,000 from the number of December of 2010. (Because many jobs are seasonal, it’s more accurate to compare numbers from a year ago than month-to-month.)
The other piece of data released today is the payroll survey, a survey of 160,000 workplaces, which showed 200,000 new jobs being created. (This is the same survey that earlier this year showed zero jobs created in August).
Basically the data released today is good news. Yes, the you are right though, the employment-to-population ratio is also important. But yet you are using year-to-year data, not month-to-month. So you might want to tell your readers how the employment-to-population ratio has changed since last December, as well as the seasonally adjusted numbers since the summer.
Excellent point! The employment-population ratio has always been my favorite indicator of employment. The unemployment rate is simply too biased on the interpretation of the labor force.
I wrote a sort of a follow up of your piece on my blog drawing on the data from the FRED and the BLS:
http://im-an-economist.blogspot.com/2012/01/understanding-unemployment.html
Great explanation. Why won’t the networks , financial analyst, etc.. actually disclose this info to the general public. Easy to understand and explains what the actual realtime trend is. And you wonder why the Obama admin won’t share this info.
Consider the following from the AEI online magazine, The American:
What the plunging unemployment rate really means for Obama’s reelection
By James Pethokoukis
Damn, sometime I think Mitchell is a economist or something like than! Thinking outside the box.
The Calculated Risk Blog keeps up to date graphs on this sort data in their graph gallery and posted updates today including a good graph showing the employment-population ratio and participation rate and unemployment rate over time plotted vs. recessions:
http://www.calculatedriskblog.com/