The conventional wisdom about Friday’s disappointing Jobs data was that there was a little something in the release for each candidate – weak job creation data was bad for Bush’s campaign, and the low unemployment rate undercut Kerry’s argument. This turns out to be a false dichotomy.

Some savvy number crunchers are now looking askance at the unemployment rate. These analysts are arguing that this number dramatically understates how difficult the labor situation actually is. The “incumbent friendly 5.4%” rate is in large part the result of a mathematical sleight of hand. Depending upon which underlying assumption you use, the actual number may be closer to 6.4, 7.2 or 9.4%.

The reason the unemployment rate has stayed so low, these economists argue, is not due to improvements in hiring trends; Instead, people are “dropping out” of the labor force. The measure of this is the “labor participation rate,” and it has fallen to 66% from 67.3%. While that decrease doesn’t appear large, consider it is applied to the over 140 million people in the labor force. That 1.3% drop represents nearly 2 million additional unemployed people who are not showing up in the unemployment rate data.

ISI Group’s Tom Gallagher noted that “if the participation rate was at the older, higher level, then the unemployment rate would be around 7.2%. Even using a 10-year average of participation rate yields a 6.4% unemployment rate.”

If that sounds bad, consider what happens when we add the “so-called marginally attached workers and part-timers who really want to be working full time.” Barron’s Alan Abelson (quoting the Liscio Report) concluded: counting these marginally attached and part-timers would send the unemployment rate to a formidable 9.4%. “Using history as a guide, [Liscio] reckons that “we’re now 9.3 million jobs below where we’d be in a ‘normal’ recovery.”

The shrinking labor force is why we have been enjoying a “deceptively modest unemployment rate.” In a post-bubble environment, job creation is an ongoing structural problem. Thus, these changes cannot be blamed on President Bush – at least not entirely. We questioned whether the Tax Cuts were over-emphasizing the stock market, to the detriment of the broader economy, over a year ago.

That turned out to be fairly prescient: We now see strong corporate profitability combining with anemic job creation to create a range-bound, exigent stock market.

Forget about the Presidential elections for a moment, and consider this: Without organic job creation, any economic recovery is doomed to failure sooner rather than later.

Category: Finance

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

16 Responses to “What is the Employment Situation Really Like?”

  1. BOPnews says:

    What is the Employment Situation Really Like?

    The conventional wisdom about Friday’s disappointing Jobs data was that there was a little something in the release for each candidate – weak job creation data was bad for Bush

  2. BOPnews says:

    What is the Employment Situation Really Like?

    The conventional wisdom about Friday’s disappointing Jobs data was that there was a little something in the release for each candidate – weak job creation data was bad for Bush

  3. Strong and Getting Stronger for Multi-Millionaires

    The ubiquitous Barry Ritholtz writes today at The Big Picture: What is the Employment Situation Really Like? Some savvy number crunchers are now looking askance at the unemployment rate. These analysts are arguing that this number dramatically understa…

  4. jen larson says:

    I have a fair chunk of money in the stock market and the manipulations to increase it’s prices make me furious. I am someone who believes that there is a “real value” to stocks. It may shift over time from a p/e of 14 to 20, but it may not. I think that any efforts to blow this up when it’s fairly high lead to bubbles and thumps. I don’t gain anything in the long run. I pay more for stocks, they cost more and the danger is higher. And then there is this plan of inflating the value more by pumping hundreds of bilions more per year from social security is madness. It is using government for wild speculation. And unless I am watchful and can play the game (in which case there are potentially huge profits) it can smash the value of my savings. All those individuals who follow the conservative advice and dump a steady amount into an index fund are being hustled. It is immoral.

    So is the lumping of social security with medicare and the deficit to make impossible debts (overwise SS looks ok and fixable if not great) and Greenspans claim that the fed money owed to the fund shouldn’t be paid back (putting the burden on wage earners for the national debt) so that the account goes into the red in a dozen years rather than 3 dozen. It is a game. And conscious or not it is designed to suck money away from the hard working and trusting to those who run the tables. And if you question it then you are accused of being anti capitalist and socialist.

  5. Mike says:

    I think it would be very enlightening to use the same formulas that they used to derive the employment numbers (and GDP, and CPI) back in the 1960s or 1970s — but with today’s data sets.

    If you don’t like the publicly-reported numbers, just change the way that you measure it! And beat anyone over the head that dares to question why the changes were made.

    For those of you that read Richebacher, I think he’s right.

  6. Marc Brazeau says:

    Two points.

    The first is one that I’ve mentioned to Barry before and that is economists need to come up with a set of numbers that express and track more accurately our collective economic well being.

    The current weird nervous tic in the news of reporting what the Dow did every day newsworthy or not is bizarre when you (or at least when I) think about it.

    I don’t have the answers on this, but I know two things. Joblessness should replace unemployment in how we understand the health of the labor market. 10(0)s of thousands of people’s benefits running out should make the number that we pay attention to improve. Second, profits and wages track against each other. Profits drive the economy and wages drive prosperity and I wish that we had some quotient that expressed how close they are to an optimum ratio.

    The other point is that it’s troubling that we haven’t seen any real engagement from the world of economics on this question of the structural changes that are creating massive drags on job (and wage) growth.

    The Bush administration is not at fault for the structural changes. They are monumentally negligent for not addressing them.

  7. Tech Policy says:

    What is the Employment Situation Really Like?

    This is fit to be in the Shrillblog. Barry Ritholtz is really shrill: The shrinking labor force is why we have been enjoying a “deceptively modest unemployment rate.” In a post-bubble environment, job creation is an ongoing structural problem. Thus…

  8. Marc Brazeau says:

    >>>>10(0)s of thousands of people’s benefits running out should make the number that we pay attention to improve.

    Whoops. “shouldn’t” make the number improve.

  9. Scott says:

    The argument about the labor force participation numbers is indeed a valid one, but it ignores two critical facts:

    1. Above trendline productivity (which makes higher future standards of living possible) has suppressed labor growth rates, perhaps to the tune of a million or more jobs.

    2. The GLARING difference between the establishment survey and the household survey. If you are a 1099 employee our work for your “own” LLC like I do, YOU DO NOT PAY UNEMPLOYMENT INSURANCE and you don’t show up in the establishment survey. Folks, this is a structural change in the economy and it is for the good; more entrepreneurs, fewer worker ants.

    My two cents, worth what you paid for it!

  10. DJM says:

    The change in calculating the unemployment rate is not new. It occurred during the Reagan administration and most observers didn’t seem to care at the time.

  11. What matters to me — relative tot he market — is how accurately does the headline number correspond to future economic expansion.

    You’d be surprised how many Fund Managers don’t understand this . . .

  12. BOPnews says:

    Employment Reality

    I have a new column up at Street.com: “Employment Reality Lies Between Poles.” For those of you without a subscription, its loosely based on recent comments such as What is the Employment Situation Really Like? and Employment Situation: Worse than…

  13. BOPnews says:

    Employment Reality

    I have a new column up at Street.com: “Employment Reality Lies Between Poles.” It is a pretty fair and balanced look at the strutural job problems Bush inherited, as well as some of the policies which may have made the…

  14. BOPnews says:

    Employment Reality

    I have a new column up at Street.com: “Employment Reality Lies Between Poles.” It is a pretty fair and balanced look at the structural job problems Bush inherited, as well as some of his policies which may have made the…

  15. Jeff Mark says:

    Re: The Big Picture:
    I won’t trivialize the plight of those struggling to keep it together in spite of being unable to find remuneratory employment. It’s scary. But what most of these folks need is not necessarily a “job”; what they need is “income”. An idea that found some currency (sorry) in the late 80s is that “unemployment” is not a “disease” that needs to be cured; it is the normal and predictable result of an economy that requires less and less actual labor for its production. We don’t have an “unemployment problem” in America today. What we have is a maldistribution of leisure time. Some people have way more than they can use; we call these people “unemployed”. Some don’t have nearly enough; we call those folks “middle class”.

    The obvious solution is to institutionalize the 32-hour work week. The 1930s experiment that Kellogg’s did indicates that even if workers’ hourly rates were not increased to compensate for the 20% decrease in paid time, effective take-home incomes would return to “normal” in a few years. And how about all the jobs for which a decent income requires 10-15 hours of overtime each week?

    It’s said that it’s “work” if you’d rather be doing something else. Talented political writers, artists and the like manage to obtain income from something they’d be doing anyway. The rest of us work too much.

  16. Robert Sherrell says:

    For all of the incredible data about unemployment that I have seen, there is almost a total lack of anyone, (including the candidates), talking about how the percentages of the monthly new jobs shake out. This 890,000 net loss is NOT the real picture of the agony.

    Every single month, the biggest percentage of created positions is in “SERVICE” jobs. Each month we lose manufacturing and white-collar jobs while gaining thousands of service jobs.

    We have outsourcing of jobs from financial to software to almost anything else under the job sun occurring on a daily basis.

    Maybe you, reading this, has a nice job, but how long can this erosion of decent paying jobs continue before the tap on your shoulder arrives? I happen to know REAL people that are working multiple service jobs just to pay the bills. Remember that many middle-class people have both spouses working to acheive their goals in life. How about holding down two or three jobs by yourself and the spouse also? What is going to happen to your quality of life with that horrendous schedule?

    Meanwhile jobs are going overseas to employ people that will NOT be investing in America for the Americans. Loaning billions to our government, (thanks Red China), is not helping us.

    This erosion of thousands of quality jobs each month will eventually wreck our economy as we know it. I might not be so upset if the companies that are exporting jobs were actually on the edge financially, desperate to stay afloat. But, nope, We have the trillion dollar companies like Microsoft, IBM, HP, and so on. They lay off tens of thousands of employees, (or don’t hire here except in token amounts), while increasing their own profit margins to incredible levels.

    Also, Unemployment used to last for a year. Now the amounts are drilled lower and you fall off the unemployment lists in 6-8 months in a lot of states. So you stop receiving checks and help improve the unemployment numbers. Irony, yep.

    We can’t stop outsourcing, but for America’s sake, let’s not make it even more obscenely profitable by giving companies a tax break for their profits overseas and also tax breaks for moving the jobs overseas. Maybe (?) it would slow it down.

    Whatever God is up there, I hope some help is forthcoming soon….we sure could use a break.

    Robert