Politics & Policy

Fire the BLS’s Unemployment Rate

It should be replaced with a metric that reflects population growth and job creation.

Each month, the Bureau of Labor Statistics releases its latest news on the job market. The agency breaks down the jobs data six different ways and calculates six different unemployment rates. But all this data does little to answer clearly the one key question: Is it easier to get a job now than it was before?

If you just looked at April’s official unemployment rate of 7.5 percent, you could easily conclude that the employment situation is at least better than it was when unemployment peaked at 10 percent in October 2009. Yet, as millions of Americans know, jobs are still hard to find, and the labor market feels stagnant at best. These Americans are not mistaken: The official unemployment rate is such a misleading statistic that anyone seeking a true picture of the American economy should stop using it. At the very least, they should consider it in context.

As most people know, the unemployment rate is simply the percentage of workers in the labor force who don’t have a job. But few people know how the BLS defines these terms, particularly “labor force.”

If a worker has not looked for a job in the last 30 days, that person is not considered part of the labor force, even if he or she still wants a job. Perversely, if the economy gets so bad that large numbers of people stop looking for work, these dropouts actually decrease the unemployment rate. Clearly, the unemployment rate gives an incomplete picture unless one also considers the percentage of Americans the BLS counts as the “labor force” — the labor-force-participation rate.

For example, when the unemployment rate peaked in October 2009 at 10.0 percent, the participation rate was 65 percent. It has since dropped to 63.3 percent. If the participation rate had not declined since 2009, we’d have an unemployment rate today of 9.9 percent, nearly identical to the official unemployment peak. In other words, nearly the entire improvement in the unemployment rate since October of 2009 is due to a drop in the percentage of people the BLS considers labor-force participants.

The participation rate last hit 63.3 percent during the Carter administration, in May of 1979. Over the ensuing 21 years, under Presidents Reagan, Bush, and Clinton, the participation rate rose steadily, reaching 67.3 percent by April 2000. All of that growth is now gone, and we’re back to the lackluster level of the Carter presidency. But we’re actually worse off today: When we had a 63.3 percent participation rate in 1979, the official unemployment rate was 5.6 percent, 1.9 points lower than the current 7.5 percent.

Not everyone who leaves the work force has given up — others retire, and the Baby Boomer generation is reaching retirement age. But the Boston Federal Reserve published a study recently finding that the bulk of the decline in labor-force participation is due to economic factors rather than demographic ones. The BLS reported that in April there were 6,413,000 people out of work who “want a job now” but were excluded from the ranks of the officially unemployed. Adding them back into the labor force produces an unemployment rate of 11.2 percent.

The BLS also reports an unemployment rate that includes all persons who have searched for work during the prior twelve months (as opposed to the past 30 days), plus all people who want a full-time job but are employed part-time for “economic reasons,” such as reduced hours or an inability to find a full-time job. That unemployment rate, the widest measure the government calculates, is 13.9 percent.

The BLS is not trying to mislead the public; it has used the same basic formula for decades. But some things have changed: The participation rate’s volatility has historically been very limited. In the 21 years from January 1988 through January 2009 (the month President Obama assumed office), the participation rate increased from 65.8 percent to 66.2 percent, only 0.4 percentage points. The peak was 67.3 percent, only 1.5 points above the trough of 65.8 percent.

During the last four years, the participation rate has declined from 66.2 percent to 63.3 percent, nearly double the change we experienced over the prior 20 years. This volatility has rendered the official unemployment rate unreliable and misleading.

So what measurements should we use to determine the health of the labor market?

A more realistic and informative metric would be what we call the “growth ratio” — the year-over-year growth in the number of jobs (measured through the BLS’s household survey) divided by the year-over-year growth in the civilian non-institutional population (the number of people who could be in the labor force). This fraction tells us whether job creation is keeping pace with, running ahead of, or falling behind population growth.

A growth ratio equal to one indicates that employment grew as fast as the population, indicating that the labor market, and the real unemployment rate, remain unchanged. A growth ratio above one indicates job growth in excess of population growth, which should reduce the number of unemployed people and result in a lower unemployment rate. A ratio between zero and one indicates that, while employment grew, it did not keep up with population growth. A negative ratio indicates that employment fell.

In April, the growth ratio clocked in at 1.18, indicating that employment growth over the previous twelve months was slightly greater than population growth. The average for the recovery to date is a dismal 0.96 — indicating that employment growth has, on average, failed to beat population growth, supporting the conclusion that the real unemployment rate has not declined. Over the last year or so, the growth ratio has clocked in around 1.20 — better, but still only slightly ahead of population growth.

Compare these ratios with the negative ratios during the Great Recession, when the growth ratio averaged -2.34. April’s growth ratio of 1.18 is about half that rate. Considering the growth ratio’s massive decline during the recession, the ratio now should be consistently hitting 1.5 or higher, as it has in prior recoveries.

It isn’t. This reveals a stagnant jobs market and a weak economy ill-prepared for any future economic distress.

In a real recovery, the economy creates enough jobs to repair the damage done and keep up with population growth; it does not just shed workers. In this respect, the current recovery has been an unequivocal failure. The numbers should reflect that.

— Andrew Puzder is CEO of CKE Restaurants, Inc., which employs about 21,000 people at Carl’s Jr. and Hardee’s restaurants. He is co-author of Job Creation: How It Really Works and Why the Government Doesn’t Understand It. Michael Talent is a recent economics graduate from the University of Chicago and was an economic-policy analyst for the Mitt Romney campaign.


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