Reports of Weak Jobs Picture Exaggerated

Posted on Friday, 11th May 2012 @ 11:35 PM by Text Size A | A | A

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By Aaron Johnson of econprofaj

There was much angst over last week’s job report.  Even though the unemployment rate dropped from 8.2% to 8.1%, many analysts honed in on the disappointing job growth of 115,000.  Typically, we need to see consistent monthly growth close to 300,000 in order to see dramatic improvement in the labor market.  However in the midst of penning another gloomy piece on employment, one realizes that a closer look at April’s numbers shows that it might not be as bad as many realize.

First, economists are quick to point out how deceptive the unemployment rate can be.  One reason is that people drop out of the labor force when job prospects are grim.  Therefore, a lower unemployment rate can lead to a misleading conclusion.  Let’s take this simple example to show how that is the case.  Assume that there are 2 unemployed people out of a labor force of 10 individuals where the labor force is defined as the sum of the unemployed and the employed.  This equates to an unemployment rate of 20%.  Now let’s assume that one of those unemployed people becomes discouraged and drops out of the labor force.  Now the labor force drops to nine individuals where there are still eight people working and one seeking work.  The new unemployment rate is 11.1%, which is much better than 20%.  However, job prospects have not gotten better, but are worse.

Is that what happened during the month of April?  Since the calculation of discouraged workers are not seasonally adjusted, it is more accurate to look at the level of discouraged workers over the last year.  When looking at Table A-16 of the Bureau of Labor Statistics, the number of discouraged workers are actually slightly down from 989,000 in April 2011 to 968,000 last month.  While it is true that the civilian labor force participation rate fell slightly from 63.8% in March to 63.6% in April, Mark Zandi of Moody’s Analytics actually thinks this could be the result of voluntary exits out of the labor force as baby boomers are starting to retire.

Also, there is a more accurate measure of unemployment in the U-6 rate, which not only captures the number of people seeking work, but also captures those that are discouraged or are underemployed.  An example of being underemployed is an individual working part-time at a local retail establishment, but actually seeks full-time employment.  When looking at this rate, there was actually no change over the last month and is currently at 14.5% and has been consistently falling since last September.  In fact, it is much lower than last April’s 15.9% and its peak of 17.2% in October 2009.

Of course, not all of the trends are improving with wage growth remaining a sticky concern.  As reported by the Economic Policy Institute, year to year growth in nominal average hourly earnings remain below the pre-recession era at 1.8%.  This 1.8% wage growth is actually much lower because it does not account for inflation.  A combination of a historically high unemployment rate and lack of outside job opportunities for workers are keeping wages down.

In closing, we definitely should not be overjoyed with the current labor market, but great pessimism is not warranted, either.

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