How to make 11% unemployment look like 8.1%

President Obama says “The unemployment rate clicked down again in April”.

Proof positive that his economic plan is working.

Not so fast.

Indeed the unemployment rate dropped to 8.1% despite relatively low job growth.

How can that be?

Easy.

The unemployment rate is a fraction: the numerator is the number of unemployed people who are actively looking for work … the denominator is the number of people employed plus the number of people actively looking for work.

Most people implicitly assume that the denominator is staying relatively constant … maybe edging up a bit.

So, they conclude that a drop in the unemployment rate is driven by unemployed people finding jobs.

Not in the Obama recovery.

These days, the unemployment rate is driven more by what’s called the labor force participation rate … the percentage of able bodied people in the population who are either employed or actively looking for work.

The labor force participation rate has tumbled in the past couple of years.

More specifically …

* * * * *

Labor Force

Since January 2009, the U.S. working age population has grown about 8 million, but the labor force has stayed pretty much flat.

image 

* * * * *

Labor Force Participation

While some of the 8 million increase in the working age population since January 2009 may have replaced folks who dropped out of the labor force, the net effect is that the 8 million increase in the working age population didn’t boost the size of the labor force.

Said differently, the labor force participation rate dropped precipitously … from about 66% to 63.5%.

While the labor force participation rate dropped a bit during the Bush years, the decline is – buy and large – a reflection of the “Obama Recovery”.

image

* * * * *

Impact on Unemployment Rate

Let’s put that drop in context:

In January 2009, the labor force participation rate was 65.71%

Since January 2009, the working age population grew by just over 8 million … from 234,738,000 to 242,784,000

If the labor force participation rate had stayed constant from January 2009 until now, there would be 159,522.672 folks in the labor force … not the currently reported 154,365,000

The BLS reported 12.5 million unemployed in April (<= note the “roundness” of the number)

The BLS reported the unemployment rate at 3.1% … 12.5 million divided  by 154.4 million.

If the labor force participation rate was still at the January 2009 level, then the current  unemployment rate would be a whopping 11%. 

Calculation:

159,522.672 minus 154,365,000 equals 5.2 million dropouts from the labor force

12.5 million unemployed plus 5.2 million dropouts = 17.7 million

17.7 million divided by 159,522.672 equals 11%

Those are the top line numbers … in subsequent posts I’ll dive deeper into the numbers and provide some “what’s going on” context

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One Response to “How to make 11% unemployment look like 8.1%”

  1. What’s up with women leaving the labor force ? « The Homa Files Says:

    […] Last week, we were fast out of the blocks posting about the drop in the labor force participation rate: How to make 11% unemployment look like 8.1%  […]

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