Friday, December 2, 2011

Stunning Decline in Unemployment, But Is It Real?

Much ado has been made about the Bureau of Labor Statistics' (BLS) just-released unemployment numbers, which showed a stunning decline from 9.0% unemployment in October to 8.6% in November. But what does that number mean, how is it calculated, and does it really imply that things are getting better?

How Is Unemployment Calculated?

Simply put, the unemployment rate is the number of unemployed people divided by the total number of people in the labor force.  I think we all have an idea of what an unemployed person is, but what constitutes the labor force? The labor force consists of people who are currently working (the employed), and people who are not currently working but are actively looking for work (the unemployed).  People who are neither working nor actively looking for work (the retired, the young, etc.) are said to be not in the labor force.

What Factors Influence the Unemployment Numbers?

Obviously, hiring and firing directly influence the unemployment numbers, as would be expected.  But there is another factor here that often gets overlooked.  Let's use a simple scenario to show how it plays out. Imagine a country with 100 total people, of which 50 are either retired or too young to work, 45 of them have jobs, and 5 of them are looking for jobs. Therefore, 50 is the total labor force for this country, of which 45 people are employed, and 5 are unemployed. The unemployment rate for this country is 5 / 50, or 10%.

Now imagine that 10 employed people retire.
The new unemployment rate for this country is 5 / 40, or 12.5%.

Now imagine that the 5 unemployed people get tired of job hunting and give up.
The new unemployment rate is 0 / 40, or 0%

Finally, imagine that 10 young people become old enough to get a job, and start looking.
The new unemployment rate is 10 / 40, or 25%.

As we can see, the unemployment rate fluctuates not just between employed and unemployed people, but also between people entering and exiting the labor force as a whole.  So with just a percentage in mind, there would be no way to see exactly what was going on in the job market.  Luckily, the BLS produces the whole range of numbers for us to look at.

What Do the Current Numbers Look Like?

According to the BLS: 

Oct 2011 Employed: 140,987,000
Nov 2011 Employed: 141,070,000
Change: +83,000

So 83,000 more people had a job in November than in October. That seems pretty good, right? So what about the unemployment numbers?

Oct 2011 Unemployed: 13,102,000
Nov 2011 Unemployed: 12,613,000
Change: -489,000

Wait, so only 83,000 more people are employed in November, but the number of unemployed people decreased by 489,000?  How does that make sense?  The answer lies, as we have seen, in shifts out of the labor force entirely:

Oct 2011 Labor Force: 154,088,000
Nov 2011 Labor Force: 153,683,000
Change: -405,000

This means, for every 100 people who are no longer counted as unemployed, that only 17 of them actually got a job!  Of this 405,000 people no longer in the labor force, it's also possible to infer how many people still want a job, but are no longer actively looking for one (so-called "discouraged workers").

Oct 2011 Not In Labor Force, Want a Job: 5,969,000
Nov 2011 Not In Labor Force, Want a Job: 6,183,000
Change: +214,000

Looked at this way, at least half of the people who moved out of the labor force did so not because they don't want a job, but because they gave up on finding one.  That's two and a half times the number of people who actually gained employment last month, and is not a great indicator of economic recovery.  But at least we gained some jobs, right?  Surely that means things are getting at least a little better?  Well, perhaps not:

Oct 2011 Civilian Population: 240,269,000
Nov 2011 Civilian Population: 240,441,000
Change:  +172,000

So in the same time frame that we added 83,000 jobs, we also added 172,000 people!  Now, most of that population growth no doubt comes in the form of newborns, who obviously won't be entering the labor force for some time.  However, their graduating big brothers and sisters are.  You might say that, if today's newborns are tomorrow's workers, then yesterday's newborns are today's workers. So how many workers are we adding each month?  As it turns out, that number is 125,000.  So, all else being equal, we would need to add approximately 50% more jobs each month than we did in November, just to meet increased job demand from population growth! Even with an increase in jobs, the job deficit is still widening

(Interesting Note: The data shows that 99.7% of people moving out of the labor force were women.  With childcare so expensive and wages coming down, are we perhaps seeing a resurgence in the number of stay-at-home moms?)

What Other Important Factors Do the Unemployment Numbers Hide?

We can also note that the simple unemployment percentage says nothing about what kind of jobs people are employed in, how much they pay, or whether or not they are making a good use of a particular worker's skills.  Thus, the unemployed quantum physicist who acquires a part-time job at Starbucks mopping floors for minimum wage is now employed for the purposes of calculating unemployment.  Such "underemployed" people are thought to comprise a not-insignificant percentage of the labor force these days (the next time you're at Waffle House, the guy cleaning the table could be a former hedge fund employee). These underemployed workers, if present in significant numbers, represent a market inefficiency that restrains economic growth.

In short, don't start celebrating just yet.