December 16, 2016

The True State of the Labor Market

By: Abdul Manan

To the untrained eye the labor market can be a tough thing to gauge. We all

understand unemployment, politicians have been talking about how they plan on

changing unemployment, or how they plan on creating jobs, or how they have

achieved one or both of these thing, but do these things matter? The obvious answer

is yes of course they matter. The more complicated answer is that they matter but

there is much more to it then just unemployment and how many jobs are available.

Figure one represents the civilian unemployment rate from 1990 until 2015. We can

see that the unemployment rate shrunk from 1992-2000 at a pretty stead pace, until

it started to fluctuate from 2001-2007, boomed (a very bad thing) from 2008-2009,

and seems to currently be on the decline.

Notes: The low unemployment in the year 2000 was a 30-year low and the

unemployment in 2010 was .1 points off of being a 30-year high. We see that the

immediate year/years following a recession is when unemployment seems to reach

its peaks. This is attributed to the fact the right after a recession is when its affects

are felt by most.

Now some people will look at the above graph and think, “we’re on the track towards

very low unemployment and that’s all that matters”. Sadly, those people would be

mistaken. Labor force participation rate is a very telling statistic; it is the rate in

which those available (anyone over 16, not serving in any branch of the military, or

not incarcerated) are working. Many people might wonder if this is just the exact

opposite thing when related the unemployment and they would also be sadly

mistaken. Unemployment rate does not take the available population into account; it

only takes into account those actively seeking work. Labor force participation (in my

opinion) is a much more telling statistic because it focuses on the general available

population as a whole and shows us the true status of our labor market.

Figure 2 shows us that the labor force participation has been relatively steady for the

last 20 years, until the great recession hit. Not only have we not recovered from the

great recession but it seems like labor force participation is just going lower and

lower.

Notes: We see that right before a recession we can see a slight dip in labor force

participation, then an even bigger dip during and immediately following a recession.

Also, some might be quick to blame the great recession, though it has sharply

declined since then, it never really recovered from the small recession back in 2001.

The Labor Market Condition Index

Some have never heard of the labor market condition index, some sing its praise,

while others seem to disagree with its methods and necessity. To give it its purest

definition we turn to investopedia and the FED, “a dynamic factor model that extracts

primary variation from 19 labor markets indicators. In other words, the LMCI tracks

changes in the labor market by finding variations from multiple labor indicators.

Indicators range from unemployment rates to wage to layoffs to business surveys”

(Sharma). In layman’s terms, this is an index on how well the labor market is doing, if

the labor market is doing well the index will be high and contrary if the opposite is

the case.

Figure 3 shows the labor market condition index. We can see that the labor market

index seems to be very high right before a recession occurs. We can also see that the

index tells us that labor market conditions have been getting better since 2010.

Notes: We can see that outside of recessions the labor index seems to be telling us

the labor market is going well. We also see the exact opposite of what we’re looking

to prove, labor markets seem to be doing just fine.

The reason I bring the Labor Market Conditions Index into this argument is because

people are quick to point to it as a reason as to why labor force participation does not

matter as much as unemployment. Many economists would disagree with such a

statement and even disagree with the idea of the Labor Market Conditions Index in

the first place. Carola Binder, who is an assistant professor of economics at

Haverford College isn’t a fan of the index, “the LMCI is an almost perfect negative

correlation with the unemployment rate, the LMCI doesn’t tell you anything that the

unemployment rate wouldn’t have already told you. (Sharma). With economists

battling on whether or not the LMCI is important we can look at the facts, the LMCI

tells us that labor market conditions are good, even though labor force participation

has hit a 30 year low.

Putting the Two Together

Showing the percentages of unemployment and then showing labor force

participation can get a little confusing. By showing the two together (by percent

change) we can see a true difference in the two and compare them side-by-side. We

must see the significance in not one of the lines, but both.

Figure 4 shows the labor force participation since 1990 compared to the

unemployment rate over the same period of time. We must remember that when

labor force participation goes up more people are working and when it goes down

less people are working. The unemployment rate is the opposite, when it goes up

that means less people are working and when it goes down more people are working.

Notes: As we can see the worst time for both were during the great recession, not

only did labor force participation go down but also unemployment shot up. We also

see that labor force participation is steadily going down and so is unemployment so

we must wonder if the dip in unemployment is simply from people leaving the labor

force.

Conclusion

Susan Jones from CNSNews quantified some of this data for us, “the labor force

participation rate dropped to 62.8 percent (near a 38-year low)”. Many people do not

understand the statistical significance of the labor force participation but we must to

fully understand the state of the labor market. Wolf Richter also had a very

interesting perspective on the condition of the labor market, “In April 2010, there

were 130.1 million nonfarm payrolls. In today’s July report, there were 144.4 million.

Hence, 14.3 million jobs have been added to the economy over the time span, even as

the total population has grown by 15.4 million. So that’s not working out very well.

On average, 205,300 jobs need to be created every month just to keep up with

population growth and not allow the unemployment situation to get worse”. We are

not growing as fast with jobs as we are in population and this could end up being

catastrophic. Many people look to retirement because once people retire it opens up

more opportunity for others, but baby boomers are starting a trend that looks like it

will continue on for the foreseeable future, working past the age of retirement. In

conclusion, something must be done to fix the state of the labor market because it is

not ok; we value unemployment rate but do not understand that positive reduction

in unemployment (a good thing) can simply come from somebody leaving the

statistic (by not actively seeking work), while labor force participation gives us an

accurate account of how much of our population works and they can only leave this

statistic by leaving the country, going into the armed forces, or going to jail.

Work Cited

Sharma, Rakesh. "What is the Labor Market Conditions Index?" Investopedia.

N.p., 30 Nov. 2015. Web. 9 Dec. 2016.

Jones, Susan . "Record 94,708,000 Americans Not in Labor Force; Participation

Rate Drops in May." CNS News. N.p., 03 May 2016. Web. 10 Dec. 2016.

Richter, Wolf. "Why this Job Market is Still Terrible: The Politically Incorrect

Numbers Everyone is Hushing up." Wolf Street. N.p., 05 Aug. 2016. Web. 10 Dec.

2016.