Saturday, February 4, 2012

There's nothing to crow about, Mr. President.

Given the state of the economy, after the dual disasters of Bush and Obama, I’ll take good news if I can find it. But does that mean we should believe the White House regarding a recent small decline in the unemployment rate?

Alan Krueger, of Obama’s Council of Economic Advisers crowed on a White House website that the recent decline in unemployment is “further evidence that the economy is continuing to heal.”

The unemployment rate, however, is a strange bird. The government doesn’t actually know how many people, who want to work, can’t find a job. Government statistics come from a survey of 60,000 households on a monthly basis. The same households get interviewed several times, on a monthly basis, until they are dropped after their 4th interview. Then, after eight months, they are back in the survey for another four months until they are dropped for good.

The government says: “Respondents are never asked specifically if they are unemployed, nor are they given an opportunity to decide their own labor force status. Unless they already know how the Government defines unemployment, many of them may not be sure of their actual classification when the interview is completed.”

If individuals were asked if they were unemployed they would use the common sense definition. Those without jobs would say “yes” while those with jobs would say “no.” The government doesn’t want to define unemployed that way—the numbers would really make them look bad.

Being jobless doesn’t mean you are unemployed. You must also be looking for work and available to work. If, like many unemployed, you spent months pounding the pavement without luck, you may stop looking. If you do, you cease to be unemployed according to government statistics.

In addition, if the survey discovers that the old lady across the street paid you $50 to clean her garden one day, you are now considered officially employed for the entire month, even if that $50 is the entire income you earned. The government says, “People are considered employed if they did any work at all for pay or profit during the survey week. This includes all part-time and temporary work…”

But, not so the employed. A person who spends the entire week off of work due to illness is still considered employed. So, an unemployed person who finds a one hour job is considered employed, while a person with a job, who doesn’t work a single hour during the same, is also employed. The definitions are skewed to make the unemployment rate as low as possible.

They even tell you that a teenager, who helps the family on the farm, but without any pay for doing so, is officially employed. If your spouse owned a business and you spend a few hours there helping, you are officially deemed employed—even if you are searching for a paying job the rest of the week.

If you are jobless—which does not mean unemployed in government lingo—then you must actively be seeking a job. If you send out 100 CVs in January, but are still jobless that month, you are unemployed. If more than 4 weeks pass since you sent out the CVs, and you didn’t send out any more, but are waiting to see if you get any nibbles, then you are no longer unemployed, you are “outside the workforce.”

Let me give an example of the convoluted way unemployment is defined. Betty applies for a job on the 1st of the month and is interviewed on the 15th. She is told that the company will let her know in about seven weeks time if she is being hired, but they tell her it looks good. On the 15th Betty tells the survey bureaucrat this information: she counts as unemployed. She sought a job and is available to work. Feeling pretty good about her application she doesn’t apply for another job as she awaits the final word. She is interviewed by the government four weeks later and is now determined to be “outside the work force” and is not unemployed, because it was more than four weeks since her last application. The next day the company calls and says they can’t hire her. If she puts in a new application anywhere before the next interview she will magically become “unemployed” again. Her actual employment status didn’t change one iota over the eight weeks, but she was unemployed, then not unemployed, then unemployed again.

Consider Phil as another example: Phil was employed at a business downtown. He went to work on Monday and was told the company had gone bankrupt and this was his last day. He lost his job. On Wednesday he is interviewed and tells them he lost his job and is now unemployed. But he isn’t—not according to the government. He worked on Monday so he is officially employed, even if he doesn’t have a job.

What this means is that unemployment figures don’t tell us what we think they do. They are skewed to underreport the number of people without jobs. The longer people go unemployed, the more discouraged they become, and the less likely they are to look for more work. They may have literally exhausted all the possibilities in their area. When this happens the government claims that they are no longer in the workforce and the unemployment rate magically goes down, even though the same person is as unemployed as he was a month earlier.

Now, if the number of people who were considered in the workforce stayed the same, yet the unemployment rate declined, we would say we are in recovery. But, if the number of people who participate in the labor market drops they no longer count as unemployed; that hides the true picture.

What about the declined in unemployment that the Obama administration recently bragged about? Did we really see unemployment decline? Or did the number of participants in the workforce decline due to despair?
According to the Bureau of Labor Statistics we know the answer. The labor participation rate for January 2012 is the lowest it has been in the last twenty years. Here is a BLS produced chart showing the percentage of adults participating in the work force. You will see that in the pre-Bush era, labor participation rates were increasing. During the first term of Dubya they dropped from around 67% to 66%.

Let us look at the Bush years by themselves to get an idea of how well his economic stimulation worked.

You can see that during the Bush years there was a steep decline in his first term and then something of a plateau over the next four years. Now for Obama.

During the second wave of “economic stimulus” the labor participation rate fell steeply. It  appears that the tiny drop in the unemployment rate is not due to the unemployed finding jobs, but due to definitional changes.

Throughout 2011 the government said that about 64% of all adults were employed. Adults are defined as those individuals over the age of 15. That is approximately 80% of the population or 245.6 million people. When the BLS says that the labor participation rate fell from 64% to 63.7%; that indicates 736,800 unemployed people stopped trying to find a job. They are no longer “unemployed” because they are no longer counted as being in the labor market.

What would be the unemployment rate had labor participation rates not fallen so substantially. Through most of the last decade the participation rate was around 66%. If you were to calculate unemployment  based on that starting point instead, you would find it closer to 12% instead. That isn’t something to crow about, Mr. President.

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