Jobs trend not as upbeat as it may seem

The following originally appeared in the Orange County Register on August 11, 2013

On the surface, July’s official decline in the unemployment rate appears to be positive news. Appearances can be deceptive. As Federal Reserve Chairman Ben Bernanke recently noted, the official unemployment rate “overstates the health of our labor markets” due to factors such as the labor force “participation rate” and “underemployment.”

July’s numbers confirm his observations.

The apparent good news: The Bureau of Labor Statistics reported a drop in the unemployment rate to …

Click here to read the full story (OC Register)

Since the Recovery Began, Population Growth Continues to Outpace Job Growth

As followers of this site know, a Growth Ratio equal to “1” indicates that employment grew as fast as the population; in that case, the real unemployment rate should remain unchanged. A growth ratio above “1” indicates job growth in excess of population growth, which should reduce the number of unemployed people and result in a lower unemployment rate. A ratio lower than “1” indicates that employment either fell or grew but failed to keep pace with population growth; in that case, an honest assessment of labor market health should show that unemployment has gone up.

While in July the Growth Ratio clocked in at 1.45%, the best reading of the year, it is still a very poor comment on the economic recovery. The average for the recovery to date is a dismal 0.98%. In other words, the labor market has actually gotten slightly worse since the recovery began. Yet the early years of a recovery should be its most robust, especially when a recession was severe.

Considering the loss in employment during the last recession, the growth ratio should be consistently hitting 1.5% or better, as it did following prior recoveries once the Growth Ratio went positive. It got close in July, due in great part to a surge in part time jobs since the beginning of the year, but is still far short of where it should be at this point in the recovery. As we posted on August 3rd, the Growth Ratio chart for July “is almost what one would expect from an economy post-recovery, where the expansion has run its course and the economy has reached equilibrium and growth is driven by population and not innovation.”

When the Pessimist is the Optimist

In July, the Growth Ratio experienced an uptick, going from 1.15 in June to 1.45, with the labor-eligible population growing by 0.99% and employment rising by 1.43%. This is the best reading of the year so far, topping a 1.22 ratio in January.
Which is a very poor comment on the economic recovery to date. Consider the following chart of the Growth Ratio, which goes from September 2010—when the ratio first turned positive—to now.

Ratio Over Recovery

After breaking above 1.00 in October 2011, the ratio has basically resided in a narrow range between 1.10 and 1.50, with isolated instances where it broke above and below. This is a pattern that has persisted for over a year now, and is very low considering the very large drop that the country sustained starting in March 2008 and going through August 2010, where the ratio averaged -2.34. In light of this significant drop, we should be seeing a ratio that is consistently above 1.50 and moving in a band between at least 1.50 and 2.00—and, a decade ago, that would have been an extremely pessimistic view of how such a recovery would progress.

This chart is almost what one would expect from an economy post-recovery, where the expansion has run its course and the economy has reached equilibrium and growth is driven by population and not innovation. It is true that we’re doing a little better than matching population growth, but not by much and definitely not enough to handle the mess created by the Great Recession.

The Real Scandal: No Jobs

The Following originally appeared on RedState.com On July 12, 2013

While the unemployment numbers for June contained some positive news, the coverage to date has obscured the continuing negative trends and ObamaCare’s increasing impact. It’s time to take a realistic look at how the fragility of our economy and the specter of big government are restricting both growth and job creation. The actual state of our labor market is a good place to start.

The “official” unemployment rate held steady at 7.6%. The economy created 195,000 jobs in June. The BLS revised payrolls for the last three months upwards and the labor participation rate (the percentage of the total population over the age of 16 in the labor force) improved slightly moving from 63.4% to 63.5%.

However, there were several very troubling indicators. The number of people who gave up looking for work because they believe no jobs were available increased by 206,000 from a year earlier to 1 million. The number of individuals who were working part time increased by 432,000, twice the number of jobs created. Full time jobs actually declined by 272,000.

In part, this increase in part time jobs and decline in full time jobs reflects a change in hiring practices in anticipation of ObamaCare taking effect. The new law substantially increases the cost of businesses providing employees health insurance but only requires that they provide coverage to full time employees. As result, employers are dividing available hours of work among more jobs, creating more part time employees and reducing the number of full time jobs. This actually reduces the official unemployment rate which counts part time jobs as equal to full time jobs.

Not surprisingly, many of the jobs the economy created last month were service jobs such as restaurant employees and store clerks that are easily converted from full to part time. The official unemployment rate may consider part time and full time jobs as equal, but American workers do not. Of the 432,000 part time jobs created last month, 322,000 went to Americans who wanted full time work but could only find part time work (increasing the total number of people working part time but wanting full time work to 8.3 million).

The BLS also calculates an unemployment rate that includes all persons who have searched for work during the prior twelve months (as opposed to the official rate’s 30 day cut off), plus all people who want a full-time job but are employed part-time for “economic reasons,” such as reduced hours or an inability to find a full-time job. This is known as the U6 unemployment rate and it is the widest measure the government calculates.

While, the impact of ObamaCare turning full time jobs into part time jobs decreases the official unemployment rate, it increases the U6 rate to the extent that people working part time jobs are doing so because they are unable to find full time jobs. As noted above, that number increased by 322,000 people in June to 8.3 million. Not surprisingly then, the U6 measure of unemployment significantly increased rising from 13.8% in May to 14.3% in June, clear evidence that the labor market is getting worse for people who want a full time job, probably because of Obamacare

The decline in the labor participation rate also hides the labor market’s anemic state. The recession’s unemployment rate peaked in October of 2009 at 10% when the labor participation rate was 65%. Had the participation rate continued at 65%, the “official” unemployment rate in June would have been 9.7% rather than 7.6%. In other words, the labor market hasn’t materially improved in the nearly four years since unemployment peaked in October of 2009; rather the unemployment rate has declined because a smaller percentage of the total population is now in the labor force. The question is then: Why has the labor participation rate declined?

Some claim that as baby boomers are retiring and leaving the labor force, the participation rate will naturally decline. But the Boston Federal Reserve published a study recently finding that the bulk of the decline in labor-force-participation is due to economic factors (a declining economy) rather than demographic ones (an increase in retirees). The BLS reports a number each month which it labels “Not in the Labor Force – Want a Job Now” that seems to confirm this study’s conclusion.

According to the BLS, in June there were 6,580,000 people out of work who “want a job now” but who BLS excluded from the ranks of the officially unemployed, including those who were too discouraged to look for a job in the past 30 days. Adding these people back into the labor force produces an unemployment rate of 11.3%, again well in excess of the “official” 7.6%.

Michael Talent and I have previously written about the unreliability of the “official” unemployment rate and the significance of a labor force that has dwindled to Carter era lows as a percentage of the total population. We have advocated a new and more reliable metric to measure the labor market’s performance that we call the “Growth Ratio”. We publish the Growth Ratio each month on line. http://growthratio.com/.

The Growth Ratio is the year-over-year growth in the number of jobs (measured through the BLS’s household survey) divided by the year-over-year growth in the civilian non-institutional population (the number of people who could be in the labor force). This fraction tells us whether job creation is keeping pace with, running ahead of, or falling behind population growth. Like the official rate, the Growth Ratio considers full and part time work equally. As such, it may actually overstate the strength of the labor market but is nonetheless an effective measure of the relationship between job creation and population growth.

A growth ratio equal to one indicates that employment grew as fast as the population; in that case, the real unemployment rate should remain unchanged. A growth ratio above one indicates job growth in excess of population growth, which should reduce the number of unemployed people and result in a lower unemployment rate. A ratio lower than one indicates that employment either fell or grew but failed to keep pace with population growth; in that case, an honest assessment of labor market health should show that unemployment has gone up.

In June, the growth ratio clocked in at 1.15%, indicating that employment growth over the previous twelve months was slightly greater than population growth. The average for the recovery to date is a dismal 0.97%. In other words, the labor market has actually gotten slightly worse since the recovery began. Yet the early years of a recovery should be its most robust, especially where a recession was severe. Considering the loss in employment during the last recession, the growth ratio should be consistently hitting 1.5% or better, as it did following prior recoveries once the Growth Ratio went positive.

In short, real unemployment is well above the “official” 7.6%. The official rate has only declined because of a very disturbing decline in the number of people the BLS considers in the labor force. In addition, as employers divide the number of available full time work hours among a larger group of part time workers, the official unemployment rate makes it appear as though our economy is growing and creating more jobs than it is. Dividing full time jobs into more numerous part time jobs is not an indication of economic growth. Yet, even with this false positive, job creation is barely exceeding population growth.

What misleadingly appears to be an improvement in the labor market is actually stagnation at best. This is not a labor market in recovery. It’s an economy in serious trouble and disturbingly unprepared for any future crises. Big government as a solution has failed. It’s time to re-energize the private sector with tax and regulatory policies that make sense.

Fire the BLS Unemployment Rate

The following originally appeared on National Review Online

Each month, the Bureau of Labor Statistics releases its latest news on the job market. The agency breaks down the jobs data six different ways and calculates six different unemployment rates. But all this data does little to answer clearly the one key question: Is it easier to get a job now than it was before?

If you just looked at April’s official unemployment rate of 7.5 percent, you could easily conclude that the employment situation is at least better than it was when unemployment peaked at 10 percent in October 2009. Yet, as millions of Americans know, jobs are still hard to find, and the labor market feels stagnant at best. These Americans are not mistaken: The official unemployment rate is such a misleading statistic that anyone seeking a true picture of the American economy should stop using it. At the very least, they should consider it in context.

As most people know, the unemployment rate is simply the percentage of workers in the labor force who don’t have a job. But few people know how the BLS defines these terms, particularly “labor force.”

If a worker has not looked for a job in the last 30 days, that person is not considered part of the labor force, even if he or she still wants a job. Perversely, if the economy gets so bad that large numbers of people stop looking for work, these dropouts actually decrease the unemployment rate. Clearly, the unemployment rate gives an incomplete picture unless one also considers the percentage of Americans the BLS counts as the “labor force” — the labor-force-participation rate.

For example, when the unemployment rate peaked in October 2009 at 10.0 percent, the participation rate was 65 percent. It has since dropped to 63.3 percent. If the participation rate had not declined since 2009, we’d have an unemployment rate today of 9.9 percent, nearly identical to the official unemployment peak. In other words, nearly the entire improvement in the unemployment rate since October of 2009 is due to a drop in the percentage of people the BLS considers labor-force participants.
The participation rate last hit 63.3 percent during the Carter administration, in May of 1979. Over the ensuing 21 years, under Presidents Reagan, Bush, and Clinton, the participation rate rose steadily, reaching 67.3 percent by April 2000. All of that growth is now gone, and we’re back to the lackluster level of the Carter presidency. But we’re actually worse off today: When we had a 63.3 percent participation rate in 1979, the official unemployment rate was 5.6 percent, 1.9 points lower than the current 7.5 percent.

Not everyone who leaves the work force has given up — others retire, and the Baby Boomer generation is reaching retirement age. But the Boston Federal Reserve published a study recently finding that the bulk of the decline in labor-force participation is due to economic factors rather than demographic ones. The BLS reported that in April there were 6,413,000 people out of work who “want a job now” but were excluded from the ranks of the officially unemployed. Adding them back into the labor force produces an unemployment rate of 11.2 percent.

The BLS also reports an unemployment rate that includes all persons who have searched for work during the prior twelve months (as opposed to the past 30 days), plus all people who want a full-time job but are employed part-time for “economic reasons,” such as reduced hours or an inability to find a full-time job. That unemployment rate, the widest measure the government calculates, is 13.9 percent.

The BLS is not trying to mislead the public; it has used the same basic formula for decades. But some things have changed: The participation rate’s volatility has historically been very limited. In the 21 years from January 1988 through January 2009 (the month President Obama assumed office), the participation rate increased from 65.8 percent to 66.2 percent, only 0.4 percentage points. The peak was 67.3 percent, only 1.5 points above the trough of 65.8 percent.

During the last four years, the participation rate has declined from 66.2 percent to 63.3 percent, nearly double the change we experienced over the prior 20 years. This volatility has rendered the official unemployment rate unreliable and misleading.

So what measurements should we use to determine the health of the labor market?

A more realistic and informative metric would be what we call the “growth ratio” — the year-over-year growth in the number of jobs (measured through the BLS’s household survey) divided by the year-over-year growth in the civilian non-institutional population (the number of people who could be in the labor force). This fraction tells us whether job creation is keeping pace with, running ahead of, or falling behind population growth.

A growth ratio equal to one indicates that employment grew as fast as the population, indicating that the labor market, and the real unemployment rate, remain unchanged. A growth ratio above one indicates job growth in excess of population growth, which should reduce the number of unemployed people and result in a lower unemployment rate. A ratio between zero and one indicates that, while employment grew, it did not keep up with population growth. A negative ratio indicates that employment fell.
In April, the growth ratio clocked in at 1.18, indicating that employment growth over the previous twelve months was slightly greater than population growth. The average for the recovery to date is a dismal 0.96 — indicating that employment growth has, on average, failed to beat population growth, supporting the conclusion that the real unemployment rate has not declined. Over the last year or so, the growth ratio has clocked in around 1.20 — better, but still only slightly ahead of population growth.

Compare these ratios with the negative ratios during the Great Recession, when the growth ratio averaged -2.34. April’s growth ratio of 1.18 is about half that rate. Considering the growth ratio’s massive decline during the recession, the ratio now should be consistently hitting 1.5 or higher, as it has in prior recoveries.

It isn’t. This reveals a stagnant jobs market and a weak economy ill-prepared for any future economic distress.

In a real recovery, the economy creates enough jobs to repair the damage done and keep up with population growth; it does not just shed workers. In this respect, the current recovery has been an unequivocal failure. The numbers should reflect that.

Good? Not on Closer Inspection

By: Andy Puzder and Michael Talent

Today’s jobs report was better than many expected. Nonfarm payroll employment increased by 165,000, on top of another 114,000 in March and February due to revisions, and the unemployment rate dropped to 7.5%. For the year as a whole, average nonfarm job growth rose to 196,000.

However, this is not the whole story. The labor force participation rate was unchanged in April, staying at a historic low of 63.3%. The “labor force participation rate” is the percentage of adults who are either working or unemployed but actively looking for work. Since the unemployment rate peaked at 10.0% in October 2009, the labor force participation rate has fallen 1.7 points. In other words, large numbers of Americans are dropping out of the work force. Had this large drop not occurred, the current unemployment rate would be 9.9%.

Demographic factors do not account for this decline. The Boston Federal Reserve published a study this week finding that the bulk of the decline in labor force participation is due to economic factors rather than demographic ones. In its conclusion, the Report says that “labor market slack arising in the wake of deep recessions may not be well summarized by the unemployment rate” (emphasis ours).

That is a point we have repeatedly made. Given the drop in labor force participation, the “official” unemployment rate is simply not a reliable measurement of the state of the job market.

Since the unemployment rate is not a reliable measure of labor market health, we have proposed another metric for determining whether the job market is getting better or worse. This is the Growth Ratio, which is calculated by taking the ratio of year-over-year growth in household employment over the year-over-year growth in the non-institutional population.

What does the Growth Ratio indicate about April’s numbers? The Growth Ratio clocked in at 1.18 in April, indicating that YoY employment growth was 1.18 times greater than YoY population growth. This number is above the average for the recovery, which clocks in at a dismal 0.96—indicating that employment growth has, on average, failed to beat population growth. It is also consistent with the Growth Ratios of the last year or so, where the ratio has clocked in around 1.20.

But, consider the ratio in light of the job loss experienced during the Great Recession. During the recession, the Growth Ratio was, on average, -2.34. That is, employment loss was over twice as large as population growth, on average. April’s growth ratio of 1.18 is about half that rate. Considering the large decline in the ratio during the recession, the Growth Ratio should be hitting 1.5 or higher pretty consistently..

The current jobs report appears to be an improvement, but only if we accept the subpar recovery the country has been experiencing as the baseline. . The Growth Ratio is a truer indication of the health of the jobs market. It indicates that employment is only minimally beating population growth, and certainly not creating widespread employment opportunities.

Recoveries don’t last forever. Before this recovery ends, the economy needs to create jobs, not just shed workers, and it needs to create enough jobs to work off the slack left by the recession while also keeping up with population growth. We’re a long way from that.

Stop Using the Official Unemployment Rate as the Principle Means for Measuring the Labor Market’s Health

The following Commentary originally appeared on Townhall.

By: Andrew Puzder & Michael Talent
Last Friday’s jobs report was dismal. The labor force participation rate, that is, the percentage of the total population that is either working or actively seeking employment, dropped to 63.3%. That’s the lowest rate since May of 1979. Under Presidents Reagan, Bush and Clinton the labor force participation rate grew as high as 67.3% in April of 2000. All of that growth is now gone and the numbers are back to the lackluster growth and economic malaise that characterized the Carter presidency.

However, the “official” unemployment rate still ticked down to 7.6%. In light of this bizarre result, it is time to stop using the official unemployment rate as the principle means for measuring the labor market’s health.

This decrease in the unemployment rate was a direct result of the decrease in the labor force participation rate and nothing more. Fewer people actively seeking employment means the unemployment rate falls. This is because of how the Bureau of Labor Statistics calculates the unemployment rate. When people stop looking for work—because of, for example, a lack of jobs—the BLS subtracts them from both the labor force and the ranks of the unemployed. The net result is a decrease in the unemployment rate. So the more people who give up participating in the work force, the more the government will report that unemployment has declined.

To understand the participation rate’s effect on the “official unemployment rate,” look at the impact of keeping the rate constant over time. The unemployment rate peaked in October 2009 at 10.0%. Since that time, the labor force participation rate has dropped 1.7 points from 65% to the current 63.3%. Holding the participation rate constant at its October 2009 level of 65% would produce an “official” unemployment rate today of 10.0%, identical to the “official” rate in October of 2009. So, the entire improvement in the unemployment rate since October of 2009 is due to a drop in the participation rate. Rather than indicating an improving labor market, the decline in both the “official” unemployment rate and the labor force participation rate indicates a depressed and stagnant labor market.

It’s a sweet set up for those who are in power. They can say that unemployment is going down even as the labor market declines. If no one in the United States had a job, and everyone had given up looking for work—and the real unemployment rate was 100%—our government would tell us that the unemployment rate was zero.

So what measurement should we use to determine the health of the labor market? An honest assessment would look at the number of jobs created, not the number of people who give up looking for work, and compare that to the growth in population. In a recent article, we proposed a more realistic and informative metric which we call the “Growth Ratio”. http://townhall.com/columnists/andrewpuzder/2013/04/05/jobs-numbers-demystified-n1558261.

The Growth Ratio is simply the ratio of the year-over-year growth in household employment divided by the year-over-year growth in the non-institutional population—that is, the number of people who could be in the labor force. This fraction tells us whether job creation is keeping pace with, running ahead of, or falling behind population growth. A Growth Ratio equal to one indicates that employment grew as fast as the population; under those circumstances, all else being equal, the unemployment rate should remain unchanged.

A Growth Ratio above one indicates job growth in excess of population growth, which should reduce the number of unemployed people in the labor force and result in a lower unemployment rate. A ratio between zero and one indicates that, while employment grew, it grew slower than the population. A negative ratio indicates that employment fell over the time period. To produce a true economic recovery that would meaningfully reduce real unemployment, employment growth should be above one, which means it is greater than population growth.

What does the Growth Ratio show about the March jobs report? The ratio clocked in at 0.90 in March, showing that year-over-year growth in employment failed to keep pace with year-over-year growth in the labor-eligible population. In the 31 months since the Growth Ratio turned positive, the average ratio has been 0.95, indicating that, on average, yearly employment growth has failed to beat yearly population growth during the “recovery” on a monthly basis.

In other words, employment growth has failed to keep pace with population growth. The labor market is losing ground. Nor can the dismal March jobs report be blamed on the sequester. While March’s Growth Ratio was lower than in recent months, it is not an outlier when viewed in light of the overall trend since the recession officially ended — which clearly shows that employment growth has hovered around population growth.

The official unemployment rate has hidden this fact well. Ever since October 2009, the rate has been falling, not because the US is adding jobs, but because fewer people are actively looking for work. Many of them want jobs, but simply give up in frustration after repeated but failed efforts to find one. This takes them out of the labor force and drives down the official unemployment rate. In fact, the BLS reported that in March there were 6,722,000 people out of work who “Want a Job Now,” that it excluded from the ranks of the unemployed. In the real world, these people are unemployed, but in the government’s world, they have vanished from the labor force. Adding them back into the labor force and therefore the ranks of the unemployed produces an unemployment rate of 11.4%.

The punch-line of the March jobs report is that Americans should no longer consider the “official” unemployment rate as a reliable measure of the opportunities actually available (or unavailable) to working age people. The “Growth Ratio” is a truer measure, and it shows, at best, a tepid recovery with a stagnant labor market. Welcome to the Obama economy.

Jobs Numbers Demystified

The following commentary originally appeared on Town Hall.

Andrew Puzder & Michael Talent

Trying to figure out what the “official” unemployment rate means can be very frustrating. Much of what we hear is complex and counter intuitive. The numbers seem inconsistent with what people are experiencing and many people are simply losing interest. We hear about growth in the non-institutional population, a decline in the labor participation rate, people who are unemployed and want a job not being counted as unemployed just because they haven’t looked for a job in 30 days, and people who are working part time because they are unable to find full time employment being counted as fully employed. Even the Bureau of Labor Statistics breaks down the jobs data in six different ways and calculates six different unemployment rates.

Clearly, the employment situation is better than when unemployment peaked in October 2009 and there has been some positive economic news, particularly in the February jobs numbers. Yet large numbers of people are still unemployed and jobs are still hard to find. When a company announces open positions, the line of job seekers is long and snakelike as hundreds, if not thousands, of unemployed Americans wait for a chance to apply. There is a sense that while things could be worse, something is amiss. Is the unemployment picture really improving? Are the government’s economic policies working or masking serious underlying problems? We need a simple metric that tells us whether the economy’s is generating enough jobs. So, we decided to propose one.

In an effort to cut through the clutter, we went back to the basics. While the economy has been “recovering,” our employable population has also been growing. On average, about 119,000 people join our labor force each month and they need jobs. Everyone acknowledges that for there to be a genuine recovery, the economy must create sufficient jobs both for people coming into the labor force and for those who are already unemployed. Our goal was to come up with a simple method to determine whether our economy is creating jobs sufficient to meet this demand.

We call this new metric the employment/population growth ratio, or simply the “Growth Ratio.” We utilized the underlying data from the BLS’s “household survey.” The Growth Ratio is simply the ratio of the year-over-year growth in household employment divided by the year-over-year growth in the non-institutional population—that is, the number of people who could be in the labor force. So, for example, in order to calculate the ratio for February 2013—the most recent month for which we have data—we calculated the percentage growth in household employment since February 2012 and the percentage growth in the non-institutional population over the same period. The ratio is the percentage growth in household employment divided by the percentage growth in the non-institutional population. In this way, we have a number that tells us whether job creation is keeping pace with, running ahead of, or falling behind population growth. To produce a true economic recovery that would meaningfully reduce the unemployment rate, employment growth should be larger than population growth.

A Growth Ratio equal to one indicates that employment grew as fast as the population and the unemployment rate should remain unchanged. A negative ratio indicates that employment fell over the year. A Growth Ratio above one indicates job growth in excess of population growth, which should reduce the number of unemployed people in the labor force. A ratio between zero and one indicates that, while employment grew, it grew slower than the population. We began our series in 1960 and have it current through February 2013. During this period, the population grew, year-over-year, for each month in the series. We have highlighted in gray recession months, as dated by the National Bureau of Economic Research.

Click here to see chart

As this chart demonstrates, during the 2007-09 recession, employment fell, on average, 2.34 times faster than the population grew on a yearly basis. That is, the decrease in the number of people working was over twice as fast as the increase in the number of people who could work, which created a huge jobs deficit. In addition, the recession saw both the deepest and longest dip in the Growth Ratio since 1960, with 27 consecutive months of negative employment growth relative to population growth.

This supports the administration’s claim that it inherited a mess. However, while the Growth Ratio turned positive in September 2010, it took until October 2011 for the Growth Ratio to consistently break 1.0 (the point at which employment grew as fast as the population). As such, for over a year after the economy stopped shedding jobs, the number of jobs the economy created, in a year-over-year time frame, failed to exceed year-over-year population growth on a consistent basis.

Such an anemic growth ratio is unexpected for a bust of such magnitude. There appears to be a rough correlation between the depth of a recession and the size of the recovery following it. This is to be expected. A deep recession would leave many people unemployed. The presence of such a large amount of “slack” in the labor market should result in a very high Growth Ratio, as the recovery generates jobs both for the people entering the labor market and those who found themselves unemployed in the downturn. However, this is a phenomenon that we have not seen with the current recovery.

For example, consider 2012, arguably the best post-recession year for job growth, the Growth Ratio averaged 1.21. That is, yearly employment growth was only 1.21 times faster than yearly population growth. Last month, the Growth Ratio was only 1.05—that is, from February 2012 to February 2013, employment growth barely beat population growth.

In the 30 months since the Growth Ratio turned positive, there were 18 months in which the ratio was greater than 1.0, and 12 in which the ratio was less than 1.0. On average, the ratio has been less than one, at 0.95. In short, yearly employment growth has, on average, failed to beat yearly population growth each month during this recovery. Why then, did the unemployment rate decline?

The reality is that there would have been virtually no improvement in the unemployment rate if the increase in the employable population corresponded with a similar increase in the labor force—that is, if the labor force participation rate had stayed the same. As the Growth Ratio indicates, the decline in the “official” unemployment rate—despite an increase in the employable population—means that relatively fewer people are choosing to participate in the labor force. That is, the labor force has deteriorated.

The BLS job numbers for February support the results the Growth Ratio produced. According to the BLS release, the labor force participation rate is 63.5%, not only the low mark for President’s Obama’s tenure but the lowest rate since September of 1981. The BLS also noted that of people “not in the labor force,” there are 6,821,000 who “want a job now.” Adding these individuals back into the labor force and the ranks of the unemployed produces an unemployment rate of 11.6%.

What is the significance of these numbers? We are now two and a half years into the recovery. Considering the magnitude of the job loss during the 2007-09 recession, there should be a “slingshot” effect which causes the economy to create jobs to make up for the jobs lost during the downturn, and then expand opportunities for young people entering the labor force. That is, we should see a Growth Ratio well above 1.5. That has not happened here; the American economy is still over 7 million jobs behind where it should be just to compensate for the jobs lost during the recession plus the population growth that occurred in the interim.

That is why the lines for each new good job are so long despite the recovery. America needs pro-growth policies, like tax, regulatory, and entitlement reform, to sustain and deepen economic growth. The Ryan budget just introduced in the House of Representatives would be a good start. Otherwise, the young people entering the labor market, and the older workers who have been laid off, are going to wait a long time before they find a job.

The Illusory Job Recovery

The following originally appeared on The Daily Caller on January 14, 2013.

By: Andrew Puzder & Michael Talent
The government recently reported that the economy added 155,000 payroll jobs in December while the unemployment rate remained unchanged from a revised 7.8% November rate. Payroll employment has increased by 1.8 million over the past year, with growth averaging about 153,000 jobs per month.

These headline numbers are in line with what we have seen for most of the second half of 2012 and are routinely called “solid.” During the campaign, President Obama ran on the fact that the unemployment rate has gone down since its peak in October 2009. But the actual picture of the economy is quite different from what the administration suggests. What the “recovery” has produced is a degrading total labor force and an economy that is barely producing enough jobs to keep up with population growth.

Most people believe, understandably, that the unemployment rate is the number of unemployed adults divided by the total number of adults. But that is incorrect. The best way to think of the official unemployment rate is as a fraction where the numerator and denominator are defined as follows:

Numerator: The number of unemployed adults who do not have a job, are available for work and are looking for work. This figure excludes unemployed adults who do not report having looked for a job in the previous month.

Denominator: The number of people in the numerator plus the number of people who are employed.

When adults stop looking for work, they are subtracted from both the numerator and the denominator. When you subtract the same amount from both the numerator and denominator in a fraction, the fractional percentage goes down. So the more people who give up participating in the labor force, the more (perversely) the government will report that unemployment has declined.

If no one in the United States worked or was looking for work, our government, in all its wisdom, would report that the unemployment rate was zero.

The unemployment rate has fallen in recent years largely because so many people have left the labor force. The labor force participation rate (the percentage of the population considered to be part of the labor force) was 63.6% in December 2012, unchanged from November and down 0.4 points from December 2011. This decline is responsible for about six-sevenths of the decline in the unemployment rate in 2012, or 0.6 points off the 8.5% rate the country faced in December 2011. Only one-seventh of the decline can be explained by actual growth in employment. Without this drop in labor force participation over 2012, the unemployment rate would be 8.4%.

Such a phenomenon is not unique to this year. This declining labor force participation rate has been a hallmark of the current recovery and the driving force behind the improving unemployment rate. The peak unemployment rate was 10.0%, reached in October 2009. It has since fallen 2.2 points, to 7.8%. However, more than 90% (2 points) of this drop is due to a 1.4-point drop in the labor force participation rate, from 65.0% to 63.6%. Without this drop in the labor force participation rate, the unemployment rate would be 9.8% today. During this same period, the number of people the government reports as “not in the labor force” but who “want a job now” has increased by 746,000, or 12%. Were the labor market improving, this number obviously would be decreasing. So claiming that the job market is in recovery is simply wrong. The economy may have stopped shedding jobs, but it has yet to stop shedding workers.

Looking at payroll employment data provides more evidence of the overall weakness of the job market. Since reaching a trough in February 2010, the nation’s payrolls have added about 5.2 million jobs, or about 152,000 per month. This number appears impressive; in fact, the Obama campaign used a version of it on the campaign trail.

However, it is misleading. On average, the economy needs to add about 119,000 jobs per month to keep pace with population growth. Thus, in the 34 months between February 2010 and December 2012, the economy would have needed to add about 4 million jobs just to absorb the natural increase in the population. It actually added fewer than 5.2 million jobs, or a little less than 1.2 million jobs above population growth. To put it another way, after accounting for population growth, there are 7.6 million fewer jobs today than there were before the recession. At the current pace of job creation, it will take 21 more years to close this “jobs gap.”

Typically, the first years of a recovery are the most robust. But the jobs the economy should have created during the first years of the current recovery have been sacrificed to the administration’s tax, spending and regulatory agendas. Of course, recoveries don’t last forever; the next recession will begin with real unemployment at or only slightly below its level at the peak of the last recession.

The punch-line of this analysis is that the recovery has been basically illusory. As the payroll survey shows, employment growth is barely north of population growth. Instead, the vast majority of the decline in the unemployment rate is due to the decline in the labor force participation rate. The actual jobs which have been created are nowhere near enough to compensate for those which were lost during the recession and the population growth which has occurred in the meantime.

Recent events suggest that an actual labor market recovery is not in the cards. Even though the unemployment rate is effectively 9.8% — barely below its recession peak — and the economy is 7.6 million jobs in the hole, the president fought for, and got, a fiscal-cliff bill that increases the tax rate on the country’s most successful small businesses — this on top of Obamacare taxes and penalties, on top of further tax increases which the administration says it wants and on top of a whole slew of new regulations resulting from Obamacare, Dodd-Frank and the administration’s environmental agenda. And by increasing Social Security payroll taxes by 2% on the first $113,000 of income, the fiscal-cliff bill has increased taxes on 90% of taxpaying consumers. These would be questionable policies even with a low unemployment rate and job growth well above population growth. They are indefensible when the country faces an ailing labor market and a jobs gap of 7.6 million jobs.

Are we Creating Any Jobs yet?

The following Originally appeared in Human Events on December 10, 2012.

By: Andrew Puzder
On Friday Dec. 7, The Bureau of Labor Statistics (BLS) released its November unemployment numbers and the unemployment rate declined from 7.9 percent to 7.7 percent. Most people would assume this is good news indicating that our economy is heading in the right direction and creating jobs at a rate that will quickly reduce the number of people who are unemployed.

Unfortunately, neither assumption is correct. Our economic decline is continuing with a greater percentage of people dependent on government and a lower percentage of people with jobs.

Given the current state of the jobs market and the number of people leaving the labor force, the official unemployment rate taken alone has become a very poor indicator of economic growth. The key to determining whether our economy is growing is to take a look at the underlying numbers. In particular, two metrics that the BLS calls the “labor force participation rate” and people “not in the labor force” that “want a job now” have become increasingly meaningful economic indicators.

What the BLS calls the “Establishment Survey” showed that the economy created 146,000 jobs in November (while the employable population increased 191,000). However, the Establishment Survey is not the survey BLS uses to calculate the official unemployment rate. Rather, it uses the “Household Survey.” According to the Household Survey, there were actually 122,000 fewer people employed in November than were employed in October. With fewer people employed, it seems reasonable to assume that the unemployment rate would increase. Yet, counterintuitively, it declined. Why?

Let’s do the math

The answer lies in the math. Obviously, the unemployment rate is the percentage of people in the labor force without jobs. However, not every unemployed person is considered a part of the labor force. For example, the BLS removes from the unemployment rate calculation people it considers “marginally attached” to the labor force. This includes people “who want and are available for work, and who have looked for a job sometime in the prior 12 months” but have “not searched for work in the 4 weeks preceding the survey.” A subset of those “marginally attached” to the labor force are “discouraged workers” “who want and are available for a job and who have looked for work sometime in the past 12 months” but “are not currently looking because they believe there are no jobs available or there are none for which they would qualify.” In other words, even though these individuals are unemployed, and have stopped looking for a job, BLS excludes them when calculating the percentage of the labor force that is unemployed.

To see how this works, let’s assume we have a labor force of 100 people with 10 people unemployed and 90 people employed. The unemployment rate would be 10 percent. Now let’s assume that the economy creates no new jobs, 2 people lose their jobs and 5 people give up their search for a job because they believe there are none available. We now have a labor force of 95 people as 5 people became “discouraged workers” and dropped out of the labor force. We also have fewer people with jobs as two people lost their jobs taking the employed total down to 88. Finally, we have fewer people who are unemployed because, although 2 people lost their jobs, 5 unemployed people become discouraged workers dropping out of the labor force leaving us with 7 people unemployed (the 5 unemployed people who remained in the work force and the 2 newly unemployed people) rather than 10.

With a total workforce of 95 people and with 7 people unemployed, the unemployment rate would go down from 10 percent to 7.4 percent despite the fact that that the economy created no new jobs, two additional people lost their jobs and the jobs situation was so bad 5 people simply gave up looking for work. The point is that, if you are trying to measure whether our economy is creating jobs, the unemployment rate alone is a poor indicator. It is the underlying numbers that reveal the real state of the economy and job creation.

Indicator of economic decline

Looking at the November unemployment rate calculation in this context, the number of people employed declined 122,000, going from 143,384,000 in October to 143,262,000 in November. So, as noted above, fewer people had jobs. Since fewer people were employed, it seems reasonable to assume that more people were unemployed. However, the number of unemployed people also went down, declining by 229,000 from 12,258,000 in October to 12,029,000 in November. So, there were both fewer people in the labor force with jobs and fewer people in the labor force without jobs.

This apparent inconsistency between a decline in both the number of people with jobs (122,000) and a decline in the number of people without jobs (229,000) raises the question of where these 351,000 people went. The answer is that the total number of people in the labor force went down by 350,000 from 155,641,000 in October to 155,291,000 in November. Because the decline in the number of people who were unemployed (229,000) exceeded the decline in the number of people employed (122,000), the unemployment rate went down from 7.9 percent to 7.7 percent. However, this was not because the economy was creating jobs at a sufficient pace to cause a decline in the unemployment rate. Rather, it was because, while the entire labor force declined, the number of unemployed people declined more than the number of employed people. This indicates economic decline rather than growth. In fact, digging a little further into the numbers supports the proposition that we are in a continuing economic decline.

Civilian labor participation rate

BLS also measures what it calls the “civilian labor force participation rate.” This is the number of people in the labor force (those with jobs or who have sought a job in the last four weeks) as a percentage of the people in the total employable population. The employable population includes individuals over 16 years old who BLS defines as in the labor force plus those BLS defines as outside the labor force or, simply, the entire population eligible to be in the labor force.

The labor force participation rate is an extremely important number indicating the percentage of the total employable population that is actually in the labor force. A higher percentage indicates that more people have jobs or are actively seeking employment. A lower percentage may indicate a declining economy as fewer people are employed or believe they can find jobs.

Key number: 542,000 people

In November, as noted above, 350,000 people left the civilian labor force. The employable population also increased by 191,000 people going from 243,983,000 in October to 244,174,000 in November. As such, the number of people in the employable population but not in the labor force increased by a total of 542,000 (basically, the 350,000 people who left the labor force + the 191,000 who entered the employable population) going from 88,341,000 in October to 88,883,000 in November.

As such, the “civilian labor force participation rate” declined from 63.8 percent to 63.6 percent as the employable population grew and the labor force shrank. This was the second lowest labor force participation rate of President Obama’s term (the lowest was 63.5 percent in August) and otherwise the lowest labor force participation rate since December of 1981 when it was also 63.6 percent. The month after President Obama took office; the labor force participation rate was 65.8 percent. It has never been that high since and has consistently and rapidly declined over the past four years.

A decline in the labor participation rate can indicate either a poor economy or a demographic shift, or both. For example, people retiring will cause the participation rate to decrease. However, at least one study has shown that while “more people as a ratio are working in these so called retirement years than before the recession,” labor participation rates “have dropped dramatically for people in their prime working years and thus there really is a large segment of the population that probably needs a job that [is] not being counted as unemployed.”

People “not in labor force” and “want a job now”

The BLS also measures the number of people “not in the labor force” that “want a job now” which would seem to support this study’s conclusion. In November, the number of people “not in the labor force” that “want a job now” increased by 230,000 going from 6,587,000 in October to 6,817,000 In November. This is the second highest number of President Obama’s term (the highest was 6,957,000 in August). It is also the second highest number of people “not in the labor force” that “want a job now” since the BLS started collecting the data in 1994. The month after President Obama took office; this number was 1,135,000 people lower at 5,620,000. It has never been that low since and has been consistently and rapidly increasing over the past four years. This is an extremely negative sign for our economy indicating both that fewer people have jobs and that fewer people believe they can find jobs.

As such, despite November’s improvement in the official unemployment rate, our economy remains very troubled. The trend over the past four years and continuing through November is towards an increasingly larger percentage of the employable population dependent on government assistance funded by the incomes of an increasingly smaller percentage of people in the labor force. Decreasing the number of people in the labor force and increasing the number of people dependent on government indicates a seriously troubled economy following the failed European model. Increasing both the costs of doing business and the regulatory burdens on the private sector exacerbates this trend. The only way to reverse it is to work with and encourage America’s entrepreneurs and small businesses. I respectfully suggested a number of ways the current administration could reach out to the private sector in a recent Human Events article. If we want real increases in employment, we need job creation and we need to support job creators.