Steven Mnuchin, Donald Trump’s nominee for Secretary of Treasury, has criticized the “official” unemployment rate (that’s what it’s called). It is “not a sufficient indicator of the health of the labor market,” he says. Did he see an advance copy of my article in the current issue of Econ Journal Watch on the “slip and drift in labor statistics.”
From a peak of 10 percent during October 2009, the official unemployment rate fell to 5 percent during October 2015 and has since stayed at about this level, registering 4.7 percent in December 2016. Traditionally, unemployment rates of 4 to 6 percent are thought to be consistent with full employment. Yet, labor force participation has been falling and wages have been stagnant. Something is not right with the labor market.
While decrying that there is a problem with inequality and proposing an increase in the minimum wage, defenders of the prior administration argued that the labor market was performing well. The fall in labor force participation, they said, was due to changes in the demographic makeup of the population. To be sure, the population is aging. The baby-boomers are indeed transitioning to their retirement years. But, labor force participation has fallen independent of the changes in the demographic makeup of the population.
In the following chart I show the trends in the unemployment rate and in labor force participation since 2007, both as presented by the Bureau of Labor Statistics and based on calculations assuming a labor force whose demographics are fixed to what they were in 2007. You can see that some but not all of the fall in participation is due to changing demographics. Independent of the aging of the population, participation has fallen. Adding the gap in actual participation to what participation would be with fixed demographics to the labor force, you can see that the unemployment has not fallen by nearly as much as the official unemployment rate indicates.
The fall in labor force participation I call “the slip.” There has also been a “drift” in the official unemployment rate relative to other measures of labor market performance. While the official unemployment rate has returned to its pre-recession level, the expanded, U6 unemployment rate hasn’t. The official unemployment rate only counts as unemployed those who are not working who are actively looking for work. The U6 number also includes those who aren’t looking because they don’t think there are jobs out there (“the discouraged”) or who have looked for work within the past year but have stopped looking recently (“marginally attached”), and those who are working part-time and would prefer to work full-time (“underemployed”).
I also notice a drift in the BLS figures from comparable figures produced by the Gallup Organization. When Gallup began publishing an unemployment rate, it was comparable to that of the BLS. The Gallup unemployment rate has fallen, like the BLS unemployment rate has fallen, but not by quite as much. The difference has grown to 0.7 percentage points. The Gallup underemployment rate has drifted away from the BLS U6 unemployment rate by an even larger amount.
In my Econ Journal Watch article, I talk about the entire history of the concept of unemployment. In particular, I discuss what it is we are attempting to measure. Is it merely the loss of output due to the available supply of labor not being fully employed? Or, is it the ability of ordinary people to actually be successful in our economy? What does it mean to be free, if one’s decision to work is frustrated, and not merely during a recession, but for years following the start of a recovery?
Freedom shouldn’t mean, as Janis Joplin put it, “having nothing left to lose.” Freedom should mean that the goodness of decisions such as choosing to work are rewarded. That applying oneself diligently to one’s studies results in a better-paying job. That joining into a marriage means a better and happier life for yourself and for your children. The official unemployment rate masks the reality that many of our fellow citizens are being frustrated in their pursuit of the American Dream.