Repost from NetNet: Why the Unemployment Rate Has Become a Bad Joke

Published:  11 Feb 2011 | 2:00 PM ET on NetNet

By: Jeff Cox Staff Writer

The national unemployment rate is becoming an increasingly meaningless statistic when it comes to painting a true picture of economic and job growth.

While the December drop from 9.4 percent to 9.0 percent might have looked nice on paper, digging through the real numbers shows the actual jobs picture hasn’t improved at all. In fact, the situation is at best stagnating, despite headline numbers that look like things are getting better.

At the heart of the unemployment rate deception are the nearly three million Americans counted as “marginally attached” to the labor force. Those folks would take a job if offered but actually aren’t actively looking and thus not counted in the government’s official statistics. There are a million more of them than there were in January 2008, thanks to the lousy job market that seems to be improving only at the margins.

So when you see a “drop” in the unemployment rate, like we did when the January nonfarm payrolls number came out, it’s best to measure carefully the grains of salt with which one takes

“This is a significant number of people waiting on the sidelines,” Paul Ashworth, chief US economist at Capital Economics in Toronto, wrote in a must-read analysis of the labor force’s participation rate.

“Considering that there are about 7 million more unemployed now than three years ago, it suggests the pool of available labor could be 15% bigger than the unemployment figures suggest,” he concluded.

That puts the headline unemployment rate well north of 10 percent, even as the so-called “real” unemployment number—which takes into account an even broader swath of the working-age population—remains above 16 percent but in a modest decline. In fact, Ashworth attributes the drop from the cycle high of 10.1 percent unemployment to the current level “as much due to a contraction in the labor force” as any illusory improvement in the real jobs picture.

“The 836,000 decline in the labor force since (the October 2009 peak) is only slightly smaller than the 930,000 increase in employment,” he wrote. “Over the second half of last year, the labor force shrank by more than employment expanded. …In other words, the drop in the unemployment rate doesn’t reflect an improving job market, but rather a decline in the labor force participation rate.”

In fact, the participation rate is shrinking, not growing, falling to 64.2 percent, which is an eye-popping 26-year low. That trend makes it even harder to reconcile a drop in the unemployment rate, and also makes laughable the protests of some economists that the paltry 37,000 nonfarm job growth for January was due to weather.

Economists who have held bullish outlooks for the economy are taking notice.

“Never before has such a sharp decline in the unemployment rate been predicated on an ongoing drop in the labor force. The participation rate has crumbled 1.5 (percentage points) since the recovery began,” Bank of America Merrill Lynch economists Neil Dutta and Ethan S. Harris wrote in a research note.

“This labor force detachment tells us two things that should give even the most bullish of market participants room for pause: (1) structural unemployment is rising and (2) the potential rate of growth in the US is slowing.”

What’s more, those glibly dismissing inflation threats also could be in for a surprise.

“More structural unemployment and weak potential growth imply less slack in the economy and raise an inflation risk,” the BofAML team wrote.

Just today, Neal Soss, head of the economics team at Credit Suisse, said the drop in people looking for jobs is unlikely to abate for years.

“One arithmetical consequence of a subdued labor participation rate is that it requires smaller job gains to achieve the same amount of decline in the unemployment rate. Thus, the decline in the jobless rate tends to overstate the improvement in the labor market,” he warned clients.

So what’s it all mean?

Extrapolating from Soss’s analysis, we should be careful how easily we dismiss future rounds of Fed easing, political climate be damned.

“The Fed seems to share our concerns about the mathematical calculation of the unemployment rate and is beginning to downplay the improvement in that statistic in its assessment of America’s jobs problem,” Soss wrote. “We expect the Fed to maintain its accommodative policy stance until the unemployment rate drops for a good reason: because monthly job gains move to a much higher plateau.”

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Filed under Full Employment, Job Voucher Plan

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