Posts Tagged ‘Employment-Population Ratio’

For the past several years, on the issue of jobs, I’ve focused more on the employment-population ratio rather than the official unemployment rate.

Both figures are important, of course, but I think the employment-population ratio has more economic meaning since our prosperity ultimately is based on how many people are productively employed.

To put this in wonkish terms, our national economic output is a function of the efficient allocation of labor and capital.

The reason I bring this up is that many people think the job market is now in great shape because the unemployment rate has dropped to 5.6 percent.

To be sure, that’s good news when compared to the much higher rates of joblessness that plagued the nation a few years ago. But one of the reasons the unemployment rate has dropped is that many people have left the labor force.

Here’s a chart based on data from the Bureau of Labor Statistics showing how many people have jobs compared to the working-age population. As you can see, there’s been scant improvement in this important indicator.

The problem isn’t that the ratio plummeted during the downturn. That always happens.

What’s worrisome is the fact that there wasn’t a bounce back in the right direction after the economy started to improve.

Indeed, it’s become such a problem that the establishment media has started to notice.

Here’s some of what Reuters reported on Fridays good news/bad news jobs report.

…wages posted their biggest decline in at least eight years in a sign the tightening labor market has yet to give much of a boost to workers. …The jobless rate fell 0.2 percentage point to a 6-1/2-year low of 5.6 percent, but that was mainly because people left the labor force. The drop in labor participation and a surprise five-cent, or 0.2 percent, decrease in average hourly earnings…the labor force participation rate, the percentage of the working age population who either have a job or are looking for one, dropped back to the 36-year low of 62.7 percent reached in September.

The labor force participation rate, which is mentioned in the Reuters article, is another set of data that is rather similar to the employment-population rate.

Here’s a chart that’s been circulating on Twitter, based on data from the St. Louis Federal Reserve. You can see that the labor force participation rate jumped significantly between 1970 and 1990, in large part because more women were entering the job market. But in recent years, the trend has been in the wrong direction.

And if you parse the data, you can see that the big problem is among those without a college degree.

Now that we’ve cited lots of data, let’s speculate on why we have fewer and fewer people productively employed.

There are several possible answers, including the big increase in people scamming the disability system.

There’s also the jump in tax and regulatory burdens, though that presumably impacts all economic statistics.

Obamacare deserves its own special mention since it imposes a significant penalty on work.

And, until recently, the government had a policy of endless unemployment benefits that made work relatively less attractive.

So the bottom line, as you might expect, is that the problem is too much intervention and bloated government. Which means the answer is free markets and less government.

P.S. Some readers will have noticed that this piece cites both the employment-population ratio and the labor force participation rate. These two data series are sometimes used interchangeably, though I prefer the former for reasons explained in this article for the BLS’s Monthly Labor Review.

P.P.S. If you want a humorous take on labor economics, I recommend this Wizard-of-Id parody, as well as this Chuck Asay cartoon and this Robert Gorrell cartoon.

P.P.P.S. To end on a glum note, Obama wants to increase the minimum wage. You don’t need to be a rocket scientist to know whether that’s going to help or hurt the job market.

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When the monthly job numbers are released, most people focus on the unemployment rate.

On many occasions, I’ve cited that number, usually to point out that the unemployment rate is far higher than the Obama Administration promised it would be if the so-called stimulus was enacted.

That episode should be additional proof that Keynesian economics is misguided.

But that’s not the issue we should be worrying about now. Instead, our concern should be what appears to be a permanent reduction in the share of the working-age population that is employed.

As I explain in this interview for Blaze TV, our ability to produce is governed by the quality and quantity of labor and capital in the economy. Unfortunately, it appears that the Bush-Obama policies of bigger government have had a negative impact.

To build upon that interview, here are the very latest numbers from the Bureau of Labor Statistics.

To be fair, the drop you see on the chart started before Obama took office. But he can be fairly blamed for the fact that there’s been no recovery.

Obama Jobs Legacy

The moral of the story is that bigger government is not a recipe for prosperity.

The burden of government spending is too high, the tax code is too punitive, red tape is hindering entrepreneurship, and various handouts are creating a dependency culture that discourages work.

Should we be surprised that the employment-population ratio is grim?

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The Labor Department just released its monthly employment report and the White House is probably not happy.

There are several key bits of data in the report, such as the unemployment rate, net job creation, and employment-population ratio.

At best, the results are mediocre. The unemployment rate generally gets the most attention, and that was bad news since the joblessness rate jumped to 8.2 percent.

What makes that number particularly painful is that the Obama Administration claimed that the unemployment rate today would be less than 6 percent if the so-called stimulus was adopted. But as you can see from the chart, squandering $800 billion on a Keynesian package hasn’t worked.

While that chart is probably embarrassing to the White House, I think the most revealing numbers come from the Minneapolis Federal Reserve Bank’s interactive website, which allows users to compare employment data and GDP data for different business cycles.

I looked at those numbers a couple of months ago, so I could compare Reaganomics and Obamanomics, and the difference is startling. The Reagan policies of lower tax rates, spending restraint, deregulation, and tight money generated much better results than the statist policies of Obama.

The most recent numbers, shown below, aren’t any better for the Obama Administration.

But I suppose the good news is that the United States is not Europe. Government is even bigger on the other side of the Atlantic and many of those nations are in the middle of a fiscal crisis and the unemployment rate averages 11 percent.

Sort of makes you wonder whether there’s a lesson to be learned. Maybe, just maybe, bigger government means weaker economic performance.

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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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