Unemployment Rate Is Much Worse Than It Looks

The September Jobs report published Friday by the labor Department was a deep disappointment. Only 96,000 jobs created in August, a pathetically small number, about a third fewer jobs than the monthly increase in the working age population.

President Obama and his supporters, hoping for a positive response from recession weary voters, rushed to the cameras to call attention to the apparent, slight improvement in the unemployment rate, down from 8.3% in July to 8.1% in August.  [Continued below the chart]

But it turns out that the unemployment rate statistic is misleading. 

As the chart above shows, the long, slow decline in the unemployment rate since it peaked at 10% in 2009 coincides with a an unprecedented decline in the labor force participation rate.

  • The Labor Force is the sum of all persons who have jobs plus all who are officially classified as “unemployed.”
  • The unemployment rate is computed by dividing the number of unemployed by the the labor force.
  • The labor force participation rate is the percentage of all working age adults who are officially counted as “in the labor force.”

The chart above shows that since the unemployment rate began to fall from it’s peak in October 2009 millions of people – almost four million – who lost  jobs are no longer classified as “unemployed.”  They have been reclassified as “not in the labor force.” Excluding people from the labor force this way artificially lowers the unemployment rate.  If they were still counted as in the labor force and unemployed, the August Unemployment rate would have been 10.4%

Thus, the decline in the unemployment rate over the past 34 months has been due entirely to reclassifying unemployed men and women as “not in the labor force.”

The chart to the left shows the first 34 months of employment recovery following the last recession.  The labor force participation rate declined slightly but ended up just a tenth of a percentage point below where it began.  Thus, the decline in the unemployment rate during this period was real, not a statistical deception.

The next chart shows the first 34 months of job recovery from the recession of the early 1990s. Again the participation rate dipped slightly but ended up higher than where it began.

The Labor Department began compiling these statistics in 1946.  Since then there have been nine recessionary periods of job loses.  The current recovery is the first time the labor participation rate has declined during the first 34 months of recovery.

The next chart shows the first 34 months of recovery after the recession President Reagan inherited in 1981.  While the media relentlessly remind us of their opinion that President Obama inherited the worst recession ever, the data tell a different story.

The unemployment rate spiked up higher in 1982 than it did in 2009.  In the early eighties mortgage interest rates soared to above 15% compared to about 4% today.  One of the causes of the 1982 recession was a monetary crisis that drove inflation as high as 15%.

But the recovery from the 1980s recession was spectacularly successful because Reagan’s policies of cutting taxes and reducing the regulatory burden on investors and businesses released the economy to grow and create more jobs.  The result was a much more rapid reduction in the unemployment rate coinciding with a dramatic increase in the labor force participation rate.

At the basic, philosophical level, Ronald Reagan believed in economic liberty while Barack Obama believes in the progressive dream of a powerful government directing and controlling the economy from Washington.

The last chart tracks the recovery that began in 1975.  again, the participation rate increased at the same time the unemployment rate came down.

6 Comments so far

  1. Manny1948 on September 8th, 2012

    Obama promises a “Presidency of action.” Thats the problem! Too much Presidential “action.”

    Obama could have won reelection by a landslide if had just backed off and let the private sector do what it does best, growth and jobs.

  2. FroggyBottom on September 8th, 2012

    This simplistic analysis doesn’t take into account the disastrous jobs market Bush left behind. You can’t change reality, almost 5 million fresh, new jobs during Obama’s years vs 8 million jobs lost in the final year of the Bush trickle down, banks-regulate-themselves economy.

  3. CANancy on September 8th, 2012

    Dear Joe & Barack,

    Please “unchain” our economy.

    Thanks

  4. PeterSoren on September 8th, 2012

    As we look at these job numbers we must remember that they aren’t just numbers, they are people (who are not corporations). People who have – or had – lives, homes, families, children in school. for them this is not numbers it’s personal tragedy.

    Think about that and don’t forget whose fault it is Job numbers got you down? Don’t forget whose fault that is: http://t.co/26g7bjAf

    We’ve been waiting since November of last year for the Repubican House to act on President Obama’s jobs bill. By now there could have been an additional 2 million jobs.

  5. TinaMaria on September 8th, 2012

    23 million Americans looking for full-time jobs. And Obama expects people to vote for him.

  6. RedSoxRandy on September 8th, 2012

    It is abundantly clear that President Obama focuses on creating the kind of support system and economy that fosters innovation and new business formation. All he asks is that the top 2% pay a tax rate more proportional with their incomes.

    All you need to know about the Bush tax cuts is Mitt Romney pays 13% on a hundred million in income.