The Real Unemployment Rate
Yesterday in The Financial Times, Ed Luce hits on a point that I made when the most recent unemployment figures were released two weeks ago, namely that the unemployment figures that are shared publicly are vastly understating the real unemployment rate:
America is employing a decreasing proportion of its people. At the start of the recession, the employment-to-population rate was 62.7 per cent. The rate is now 58.5 per cent. Last month, unemployment fell from 9 per cent to 8.6 per cent. On the surface, this looked like a welcome leap in job creation. In reality, more than half of the fall was accounted for by a decrease in the numbers “actively seeking” work. The 315,000 who dropped out of the labour market far exceeded the 120,000 new jobs.
According to government statistics, if the same number of people were seeking work today as in 2007, the jobless rate would be 11 per cent. Some have moved from claiming unemployment benefits to disability benefits, and have thus permanently dropped out of the labour force.
We’ve hit on this before at OTB so it’s really not a surprise and, as Ezra Klein points out, the paradoxical result of the manner in which the government calculates unemployment is that it the jobs situation will appear to get worse even as the economy improves:
If 62.7 percent of the country was still counted as in the workforce, unemployment would be 11 percent. In that sense, the real unemployment rate — the apples-to-apples unemployment rate — is probably 11 percent. And the real un- and underemployed rate — the so-called “U6” — is near 20 percent.
There were some celebrations when the unemployment rate dropped last month. But much of that drop was people leaving the labor force. The surprising truth is that when the labor market really recovers, the unemployment rate will actually rise, albeit only temporarily, as discouraged workers start searching for jobs again.
It turns out, though, that the unemployment situation is actually worse than that, and the only reason we’re not noticing it yet is because of the demographic changes taking place in the population:
The current unemployment rate of 8.6 percent hides the extent of the economic crisis. The widely quoted rate misses not only the under-employed and discouraged workers, but also major demographic factors.
The large demographic shift that has taken place over the last few decades—driven by the maturing of the baby boom generation—now places considerable downward pressure on the unemployment rate, which makes the current malaise look a bit better than it really is.
As people (especially men) age into their thirties and forties they tend to hold onto jobs for longer, in part because they’ve usually acquired a modicum of useful skills and education, as well as a host of familial obligations that make working somewhat of an imperative. As a result, the unemployment rate for 30-somethings and 40-somethings tends to be quite low.
Economists attempt to account for these demographic forces by using a measure called the D.O.U.R.—or the Demographically-Adjusted Unemployment Rate. Recent work by Marianna Kudlyak, Devin Reilly, and Steven Slivinski of the Richmond Fed suggest that the demographic factors present in today’s economy may be suppressing the unemployment rate as much as 1 percentage point—meaning that without the current mix of old and young people we would be facing an unemployment rate nearing 10 percent.
The demographic effect we see suppressing the unemployment rate today will slowly dissipate as the baby boomers retire. And when this time comes we will either need to come to grips with a higher natural unemployment rate—which is not by itself a disaster—or else think more creatively about how to make young people’s transition into the job market easier.
But the fundamental short-term implication of factoring demographics into the equation is that, but for the plethora of aging boomers on the verge of retirement, the overall economic picture would be even worse.
At the very least, this stands as a reminder that the monthly statistics we get from the Bureau of Labor Statistics aren’t telling anything close to the whole story, and that we’re likely to be dealing with the effects of long-term high unemployment for much longer than many people are willing to admit.