Shawshank, VA 3/13/12 (StreetBeat) -- The Unemployment Rate was 9.9% in April 2010. It was a couple of tenths higher than that in 2009, but the downward path since the spring of 2010 has been steady, so for this discussion I have decided to count from there. In less than two years this measure of joblessness has declined considerably; the February 2012 reading is 8.3%.The Employment to Population ratio, known as the Employment Rate, was 58.7% in April 2010, when the Jobless Rate was near its peak. As of February 2012 this measure of employment was at 58.6%, that’s a step back during the same time frame that the more popular unemployment measure improved by sixteen percent.
I know that I have gone into some detail on this in the last few weeks, but I thought a little more hair splitting was in order. I’ll be brief, in the same sense that a root canal takes a relatively short amount of time
Both of these measures are from the Household Survey of the Employment Situation Report from the Bureau of Labor Statistics (BLS). They both use the same figure for the number of Employed which, as of last month, is up 2.759 million from its level in April 2010.
The Unemployment Rate is the percentage of Civilian Labor Force (CLF) who are considered to be statistically unemployed; jobless but recently looking for work. The CLF is the sum of the Employed and those who are counted as Unemployed. The Employment Rate is the percentage of the Civilian Non-Institutional Population (CNIP) who are currently working. The CNIP includes everyone who is sixteen and older, who live in the US, and who is not institutionalized or in the military.
One key difference between these labor market measures is that one of them tracks the unemployed while the other tracks the employed. Another key difference is the population parameters that are used.
The CLF has grown by 343k since April 2010. During that same time the number of Unemployed has fallen by 2.415 million; and as I noted above, employment is up more than 2.759 million. Since the CLF is the sum of the statistically Unemployed and the Employed, then a little math shows that the net change in the CLF for this period equals the difference in the net change of its components.
The CNIP is the number of Employed and statistically Unemployed, as well as everyone else that fits within the definition provided above. Therefore it accounts for population growth in a broad way that is not covered by the CLF, which really only tracks the labor market as defined at the BLS. The CNIP has grown by 5.106 million since April 2010. Because the number of Employed has increased by only 54.0% as much as this measure of population, then the Employment Rate lost ground during this time since this increase is less than the Employment Rate was at the onset.
The rise in the number of people participating in the labor market, the CLF, was less than seven percent of the rise in the number of people in the CNIP. Based on these population measures there are 4.8 million more people in the country today than there were less than two years ago who are not currently a part of the labor market; not Employed but not considered to be Unemployed. This relationship can be seen in the decline of the Labor Participation Rate (CLF as a percentage of the CNIP), down from 65.1% in April 2010 to 63.9% now; the pre-recession peak was 66.4%.
So what?
The US population is getting older. The argument has been made that the growth in the number of people aged 55 and older is an important dynamic behind the decline in the Participation Rate. To state the obvious, this group is more likely than others to retire; a smaller percentage of them participate in the labor market as either workers or statistically unemployed. So as the population ages there will be a natural decline in the percent of the CNIP that participates in the labor market. So don’t worry that the Unemployment Rate has fallen so sharply at the same time that the Employment Rate hasn’t shown any improvement, because the older people are just not as involved in the labor market as the rest of the eligible population.
Ergo, don’t wait for a snap back on the Unemployment Rate as a result of people returning to the labor market as job seekers, the bulk of those not participating in the last few year have left the building; the “gone fishing” sign has been posted by them. The younger crowd works, but there are not enough of them at the present time to prop up the Participation Rate because they are outnumbered by the “baby boomer” generation that has and will continue to exit. Therefore, the decline in the Unemployment Rate is sustainable and will continue unimpeded, all things being equal for the economy.
History backs this argument, but, data and trends do not support an extrapolation of history; in other words it seems to me the argument is wrong. The Participation Rate for the 55 and older group is currently at 40.4%; it is 81.6% for the 25 to 54 year olds and 54.9% for the youngsters who are 16 to 24. However, the Participation Rate for the 55+ crowd is as high as it has been in fifty years; the middle agers have not been as uninvolved as they are now for a quarter century and participation for the youngest group has not been this light since 1965. Fifteen years ago the Participation Rate for the 55+ers was below thirty percent, it has been in a bull market ever since. And an important thing to remember when it comes to population demographics is that aging occurs one year at a time, not in one fell swoop does a population grow older.
A couple of years ago the BLS wrote about this subject in an article called Record Unemployment among Older Workers Does Not Keep Them out of the Job Market. It said, “Recently, some reports have suggested that the increased labor force participation of older workers reflects both the need of many near retirees to work after large losses in their retirement accounts and the need of older workers in general to ensure adequate postretirement incomes to address increased life spans.
The fact that the rise in labor force participation for this group began well before the recent financial crisis, plus the absence of an accelerated rise in participation rates during the recession, suggests that the collapse in the financial markets and the declines in asset values were not the only factors associated with the recent rise in participation rates among older workers. Indeed, one underlying reason behind the long-term rise in participation rates among the 55-years-and-older population is the move by employers to replace defined-benefit retirement plans with defined-contribution retirement plans, allowing employers to shift more responsibility for retirement income to the employee.
This was a change that gained momentum in the 1990s, coincident with the rise in older workers’ participation rates. Although there are undoubtedly other factors that may have contributed to the rise in older workers’ labor force participation rates, many research papers have found a connection between these changes in retirement funding and those workers’ increased participation rates.” Dovetailing with this incentive to work longer is the need to continue to be employed in order to retain health insurance for the older group; something that also moves retirement further out into the future and which in turn further screws up the easy mathematical assumptions about retirement age and labor market participation.
And?
Since April 2010 the number of Employed for the 55+ group has increased by more than 2.3 million and the youngest group, 16 to 24 years old, have added 739k to their Employed total. But from then to now the 25 to 54 year olds, who account for two thirds of all the Employed, have seen their employment decline by 364k. Since December 2007, the doorstep of the recession, the Employed totals are +4 million for the oldsters, down 6.5 million for the mid-range and minus 1.8 million for the youngsters.
Sure some of this is the result of the shift in the age groups, aging population and all, but it also points out that making an assumption on the Unemployment Rate based on retirements may not be as straight forward as it once was, especially in the last few years. Thus the discrepancy between the improving Unemployment Rate and the stagnant Employment Rate is not so easily dismissed. It is a point made all the more important because it has been raised by Bernanke more than once.
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