Behind the Unemployment Numbers

February 4th, 2012 by Lee Eldridge

I’ve had a variation of this discussion at least a dozen times in the last year. Can President Obama be reelected? Absolutely. My response has basically been this: If unemployment remains above 8.5%, he’ll have a very difficult time getting reelected or convincing voters that the economy is improving under his stewardship. If unemployment falls below 8%, he has a good chance of being reelected. He can make the argument that things are getting better, just more slowly than we had hoped.

I’m sure you’ve already heard a variation of this from the White House many times.

The new jobs report came out this week and unemployment has fallen to 8.3%. From CNN: “Employers added 243,000 jobs in January, the Labor Department reported Friday, marking a pick-up in hiring from December, when the economy added 203,000 jobs. Meanwhile, the unemployment rate fell to 8.3%. That is the lowest since February 2009.”

On the surface, these look like good numbers for the economy, and great news for President Obama’s reelection campaign.

Unfortunately, this only tells part of the story.

When you see the number of jobs created, keep in mind that we need a monthly increase in the total number of jobs of about 100,000 just to keep pace with the growing population. And for instance, if 20,000 jobs are eliminated, then we need an increase of 120,000 new jobs just to keep the status quo. That’s more than one million new jobs per year.

(NOTE: I’ve seen many variations of these numbers over the years, and I’m unsure what the exact number of new jobs are that we need to create on a monthly basis. I’ve seen estimates anywhere from 85,000 to 150,000 new jobs needed per month. For today’s post, the exact number is not the point. We must create a lot of jobs just to MAINTAIN the current unemployment rate due to the growing population.)

But how does the unemployment rate drop from 8.5% to 8.3% when the economy creates 243,000 jobs? It can’t. The math doesn’t work. Unless the size of the workforce decreases. This may be one of the most important and least reported employment numbers by the media.

And this is one of the most significant problems we face today.

Labor Force Participation Rate

(Click on image to enlarge.)

The labor force expands in two ways. One, the population grows. And two, the percentage of Americans who consider themselves part of the workforce increases. This graph shows the labor force participation rate in the United States. In the ’80s and ’90s, the percentage of the population who considered themselves part of the workforce increased. For the last ten years we’ve seen these numbers continue to decline other than a short period preceding this most recent recession. Over the last couple of years, these numbers have been plummeting.

Americans are fleeing the workforce in droves. President Obama only needs a few million more people to leave the workforce to get his unemployment numbers under 8%.

Reagan Recession vs Obama Recession
Unemployment is a trailing indicator of the economy. The economy gets bad, and months later you see unemployment numbers rising. The economy gets better, and months later you see unemployment numbers going down. At least, this is what typically happens.

Following the Reagan recession, unemployment topped out at 10.8% late in 1982. Following the Obama recession, unemployment topped out at 10.2% in early 2011. The duration and depth of these two recessions are very similar. In each case, the recession was officially over months earlier. It takes several months to get to the peak unemployment numbers following a recession.

Keep in mind the chart above where labor force participation was increasing in the ’80s compared to what we see today. And here’s where we start to see some significant differences in the numbers behind the numbers.

From IBD: “To get a better sense of how bad Obama’s recovery is, consider this: Under Obama, real GDP has climbed a total of just 6% in the two-and-a-half years since the recession ended in June 2009. By comparison, real GDP had grown 16% by this point in the Reagan recovery, after the very deep and painful 1981-82 recession. Had Obama’s recovery been as powerful as Reagan’s, the economic pie would be $1.2 trillion bigger today. And had job growth under Obama kept pace with job growth during the Reagan recovery, there would be 10 million — yes 10 million — more people with jobs today.” (I added the bold.)

So during the Reagan recovery, the unemployment rate dropped despite the fact that the workforce increased by millions of workers.

And during the Obama recover, the unemployment rate has dropped because millions of workers have left the workforce.

IBD goes on to explain:

So what’s different? The presidents’ policies.

Reagan enacted sweeping and permanent tax cuts, aggressively eliminated or reduced regulations, reined in domestic spending, and championed the private sector.

Obama’s approach has been the opposite — a huge increase in regulations; meager, targeted and temporary tax cuts; a massive increase in size and scope of the federal government; and a barrage of invective against businessmen and the wealthy. Obama has bashed Reagan’s approach, saying that cutting taxes and regulations “has never worked” to spur growth.

The article in IBD was written before the new unemployment numbers came out. But here’s a recent article by one of my favorite writers, James Pethokoukis. Here’s the meat of his post:

1. If the size of the U.S. labor force as a share of the total population was the same as it was when Barack Obama took office—65.7 percent then vs. 63.7 percent today—the U-3 unemployment rate would be 11.0 percent.

2. But let’s not go all the way back to January 2009. In January 2011, the unemployment rate was 9.1 percent with a participation rate of 64.2 percent. If that were the participation rate today, the unemployment rate would be 8.9 percent, instead of 8.3 percent. As an analysis from Hamilton Place Strategies concludes, “Most of the shift of the past year is due not to the improvement in the labor market, but the continued drop in participation in the labor force.”

3. Now, to be fair, some of the decline in the participation rate is aging Baby Boomers dropping out of the labor force. But taking that into account still doesn’t get us very far, as HPS notes: “Demographic projections expect that participation rate to be at 65.3 percent. If that full participation rate is the goal, our economy is “missing” 3.8 million workers, up from the 3.4 million we noted in the white paper. The unemployment rate in that context has not budged at 10.4 percent.”

4. Then there’s the broader, U-6 measure of unemployment which includes the discouraged plus part-timers who wish they had full time work. That unemployment rate is still a sky-high 15.1 percent.

5. If the participation rate does level off at its current rate, according to HPS, the economy would need to generate 231,000 jobs per month to get below 8 percent unemployment by Election Day.

One more comment and we’ll move on. When the economy does actually begin to make some real improvement, disenfranchised workers will again start looking for jobs. It’s possible that a stronger economy will actually begin to drive up the unemployment numbers because of a higher percentage of people engaged in the workforce. Not much good news in any of these numbers.

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