FTR Blog | The Unemployment Rate Continues to Lose Substance

02.05.16 | Don Ake, FTR

I have mentioned numerous times how the impact of the Great Recession has messed with the accuracy of traditionally reliable economic indicators. This is important because economists and forecasters rely heavily on these indicators to analyze the economy and develop forecasts.

Fortunately, most of the indicators have “reset” to some degree as the economy has returned to a more stable (maybe still not normal) state. It still can be difficult to use some of these depending how long and how badly the recent history was corrupted by the recession.

However, one indicator is still producing numbers that are unreliable and not very useful. It is the monthly unemployment rate percentage.

This is significant because it is one of the most important economic indicators we have. Consider how the percentage of people employed impacts the other key indicators: GDP, retail sales, government spending, industrial production, etc.

It is also the economic indicator followed by the greatest number of people, and thus reported on most by the press. Most people have at least some interest in the unemployment rate. People are concerned with job security, wages, the general job market, etc., and the unemployment rate gives insight to all those factors. In addition, it is expressed in a single percentage and is perceived to be a simple, understandable concept, although it really is not.

When the Great Recession hit in full force, it took the unemployment rate from 4.6% (start of 2007) to 10.0% in October 2009, and the number of unemployed people from 7 million to 15 million. The unemployment rate has steadily declined, as expected during a recovery, and is currently at 5.1%.

The problem is that over the last six years there have been structural and cultural changes to the “labor force” that have significantly impacted the unemployment rate. Because the unemployment rate only includes people actively looking for work, the labor-force participation rate becomes very relevant. Unemployment Rate = number of people unemployed and actively seeking work/labor force (employed people + the numerator).

At the start of 2007, the labor participation rate (percentage of the population working or wanting to work) was 66.4%, it is now 62.4%. This is a significant decline and there are several reasons for it which I will explore in a subsequent post. However, most of the drop is due to aging baby boomers retiring. All these changes happening in a very dynamic environment creates issues with the unemployment rate.

Prior to the Great Recession, a 5.1% unemployment rate would be an indication of:

  • A strong, vibrant economy
  • Steady wage growth
  • An expanding job market, with many opportunities
  • Many employees changing jobs to become upwardly mobile
  • Great entry level positions to absorb the new college graduates

In 2015 however, we have a 5.1% unemployment rate with what would be considered a lukewarm job market. The headlines scream “Unemployment Rate Down to 5.1%,” and then the article goes on to explain why this is not indicative of the true labor market and how things are not as good as you might believe. I am so tired of seeing those headlines and hearing those reports. They are now basically worthless, mere noise in a crowded news world.

People are quick to counter the basic employment rate (U3) with the supposedly better (U6) which seeks to include people working part-time for economic reasons and discouraged workers. The U6 was 8.4% in 2007, spiking to 17.1% at peak, and is now down to 10%, but something tells me this measurement also does not carry the same weight as in the past. I do not know it is measurement related, survey related or whatever, I don’t trust the number in historical perspective.

Therefore I consider the numbers unreliable; the only benefit we receive is the direction and the basis point difference. We know that we have moved 490 basis points (according to a mathematical formula) during this recovery, but that’s about all we know. If this is the new normal, maybe the number will become relevant again in a few years.

There is an opportunity for some economic firm or university to try to develop a new employment index that would combine the government data, job growth numbers, help wanted numbers, wage growth, some new survey data, and any other relevant data available. I think this could be a very useful tool to replace the old, worn-out, employment rate.

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