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December 13, 2016

The Low Unemployment Rate Is Real!

By Dr. Stephen Craft

Forgive me for “going professor” on the world, but it is an occupational hazard …

According to the Bureau of Labor Statistics, the U.S. unemployment rate is 4.9% as of June 2016. This is significantly below the level of unemployment when the current administration took office and below the post-war mean of 5.6%.

I despise dishonest debates. I hear political figures on the right and left as well as talking heads dismissing the low unemployment rate with the claim that the participation rate is at an all-time low. The trope goes like this – the economy is so dismal that many people have given up looking and therefore are no longer considered unemployed. Therefore, unemployment is much worse than the 4.9% reported. This is a fallacy.

First, a definition. “The civilian labor force participation rate is the number of employed and unemployed but looking for a job as a percentage of the population aged 16 years and over.” Accepting this definition for the moment. Looking at participation data from 1950 until July 2016 shows that the lowest participation rate was December 1954 with 58.1 % participating. The high was January 2000 with 67.3 participating. As of July 2016, our current participation rate is 62.7 very near the post-war average of 63.0. Not too bad even with the 1950 definition.

The larger issue is this definition of participation rate underpinning the data that these political campaigns and pundits are relying upon. Specifically measuring age 16 and older. This means that every kid (like mine) that stays in school instead of dropping out and going to work lowers the participation rate. As more students finish high school and more high school graduates opt for college (increasingly an economic necessity), then the participation rate drops. Every baby boomer that retires instead of remaining in the workforce until death lowers the participation rate. This is not people giving up in disgust. This is a young person investing in his or her own human capital through education and older Americans enjoying the golden years in the style they have earned. Maybe this definition was rational in 1950 but seems quite obsolete and misleading in 2016.

Core participation rate is a better measure. The core labor force participation rate looks at the population aged 25 to 54 that are working or looking for work. This allows us to exclude students and retirees. The post-war average core participation rate is 76.7% of the population participating in the economy. The all-time high was 84.6% in January 1999. During the 1980s, the average core participation rate was 80.8% compared to the average of 81.7% from the last eight years. The current June 2016 rate shows us that 81.2% of the U.S. population is participating in the economy. We are not in record territory but the current participation rate is quite high by historic standards.

So are all of those other 18.8% of folks 25 to 54 sitting around in despair? No. They are stay-at-home parents, people seeking advanced degrees or training (past age 25), the early retired, the inherited rich, the disabled (including veterans) and any other set of reasons someone might not work. So is anyone sitting around in despair? Probably — but fewer now than during the past apparently.

So next time anyone tries to tell you that the current unemployment rate is not accurate because we have very low participation rates and that large numbers of American workers have given up looking for jobs in despair – feel free to share this analysis and tell them they are dead wrong. Wage stagnation and underemployment are real problems. However, the current low unemployment rate is quite real.

 

Dr. Stephen H. Craft
Stephens College of Business
University of Montevallo

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Dr. Stephen Craft has served as the Dean of the Michael E. Stephens College of Business at the University of Montevallo for approximately seven years. By overseeing the implementation of the Grainger Center for Professional Practice at UM and creating the college’s first professional internship program, Craft works tirelessly to ensure his students graduate as ambitious professionals prepared to step into leading roles in the modern world of business. In his role at UM, he is responsible for setting strategic direction, supporting and guiding faculty and staff, administering the finances of the Stephens College, securing resources, fundraising, building corporate and community partnerships, and maintaining the academic integrity of all programs in business consistent with accreditation by SACSCOC and AACSB International. 

Source: U.S. Bureau of Labor Statistics.