"What is a danger is that we stay stuck in a new normal where unemployment rates stay high, people who have jobs see their incomes go up, businesses make big profits. But they're learned to do more with less, and so they don't hire."-Barack Obama
The above quote from president Barack Obama is one example of how often the Unemployment rate is referenced in national politics among politicians, news organizations, and other media. It is a very important number to note and keep track of it would seem, as it would seem to be an indication towards the current and past states of the United States economy. After all, the more people that are employed, the more spending power individuals have as a whole within the economy, generally speaking. But is the unemployment rate misleading, and if so, what do the numbers really say about the current state of the economy?
First off, the unemployment rate, according to google (https://www.google.com/search?q=how+the+unemployment+rate+is+computed&sourceid=ie7&rls=com.microsoft:en-us:IE-SearchBox&ie=&oe=) is the number of people looking for work divided by the total number of people in the labor force. The national unemployment rate is computed solely from the Current Population Survey (CPS) of about 60,000 households conducted by the Census Bureau. This means that the unemployment rate also requires a basic understanding of the Labor Force Participation rate, and an understanding of where that rate is within the current economy, which we will revisit.
Going strictly off of unemployment rate numbers (http://data.bls.gov/timeseries/LNS14000000), the economy, at least in regards to unemployment, is on the upswing. The rate for unemployment for October of 2013 is 7.3%, which is the lowest - aside from September 2013 - that it has been in about 5 years, a couple of months prior to the current administration taking over. What's even more, the unemployment rate is better than it was just 2 short years ago, when it was 1.6% higher. That would be the best 2 year drop since the period of 1982-1984. Based on that, that would mean the economy is doing better than it was recently, right? Not exactly.
As noted earlier, the unemployment rate is also dependent on a firm grasp of the Labor Force Participation rate. According to AmosWEB (http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=labor+force+participation+rate) - a site that refers to itself as an online economics encyclopedia - the Labor Force Participation rate is essentially the ratio of the civilian labor force to the total noninstitutionalized civilian population 16 years of age and over. The data used to estimated the labor force participation rate is obtained along with other labor force data from the monthly Current Population Survey conducted by the Bureau of the Census for the Bureau of Labor Statistics. Based on these statistics, it is easier to get a better grasp of how many people are working compared to those that would be eligible to work.
So what do the statistics for the Labor Force Participation rate look like? The Labor Force Participation rate for October 2013 (http://data.bls.gov/timeseries/LNS11300000) is 62.8%, or a full 1% lower than it was a year ago. The current rate has steadily been decreasing as well, steadily decreasing since the late 90s, when the rate peaked at 67.3%. In each of the last 5 years, starting in 2008, the Labor Force rate has been (starting in 2008, going forward) 66.0%, 65.0%, 64.4%, 63.8% and now 62.8%, again indicating a decline in the Labor Force. Additionally, the current rate of 62.8% is the lowest that it has been in over 35 years, when it was the same in January 1978.
What does a steadily decreasing labor force indicate? It can mean any number of things. It can indicate an increase in retirees, a decrease an individuals looking for work or not being able to find work, and also a decrease in eligible participants in the Labor Force. This is one of the many reasons why economic numbers are rarely ever the whole story, so let's look at a few more numbers.
Let's simplify some of the numbers and look at a broader spectrum. For starters, the Census (http://www.census.gov) lists the population of the United States at 316,668,567. Of that population, 67,442,498 are ineligible to work, due to age (being under the age of 16). Of that amount, according to the Social Security Administration (http://www.ssa.gov), 8,380,874 people collect some sort of Social Security, and do not work as a result. That would leave a possible participating Labor Force of 240,836,295.
So how accurate is the Labor Force Participation rate? According to the Bureau of Labor Statistics (http://www.bls.gov/news-releases/empsit-t09.htm), 116, 276 people are employed with full-time employment, as of October 2013, and 27,278 are employed part-time in the same period. Combining those would make up the majority of the Labor Force rate, with some room left for individuals who are considered self-employed, and register differently.
So is the economy on the upswing, as would be indicated by the Unemployment rate? Or is the decline of the Labor Force Participation rate an indication of a slumping economy? That's for you to decide, but at least the next time you hear a politician, news reporter, or media personality reference the Unemployment rate, you can know you may not be getting the full story.