Commentary: Unemployment Rate, Participation Rate, and Tech Policy

January 4, 2013. This commentary piece explains the unemployment rate and participation rate, and recites their recent trends. While far more attention is focused on the unemployment rate, this piece argues that the participation rate now warrants notice. It is in a steep decline.

This piece also argues that this could impact technology related policy making. In particular, there is a large and growing number able bodied trained workers who no longer have jobs, and are not longer looking for jobs. They now longer count in calculating the unemployment rate, but they still vote. Politicians may seek their support by casting blame for their lack of employment on foreign competition. This may result in policies that undermine free trade, and the free flow of services, capital, data, and tech workers. This would harm tech companies and consumers both in and outside of the US.

Most of the attention to the Bureau of Labor Statistics (BLS) employment data is focused on the unemployment rate. In December it was 7.8%. In December of 2011 is was 8.5%. In December of 2010 it was 9.3%. In December of 2009 it was 9.9%. It was at a low point of 4.4% for several months in 2006 and 2007.

The participation rate in December was 63.6%. It has dropped precipitously from 66.2% in the last four years. The unemployment rate peaked at 10% in October of 2009. In contrast, the participation continues its steady decline. The participation rate had remained very close to just over 66% from mid 2003 through mid 2008.

See, TLJ table titled "U.S. Civilian Labor Force Participation Rate: January 2001 through December 2012: Seasonally Adjusted".

The unemployment rate is the ratio of the number of persons who are in the labor force, but cannot find employment, to the number of persons in the labor force. If persons loose their employment, but remain in the labor force, then the unemployment rate increases. But, if these same people are later counted as being outside the labor force, the unemployment rate decreases.

In December of 2012, the BLS reported that there were 244,350,000 persons in the civilian noninstitutional population, and 155,511,000 in the labor force. Dividing 155,511,000 by 244,350,000 produces the participation rate of 63.6% (which the BLS just reported).

BLS definitions provide that "The civilian noninstitutional population consists of persons 16 years of age and older residing in the 50 States and the District of Columbia who are not inmates of institutions (for example, penal and mental facilities and homes for the aged) and who are not on active duty in the Armed Forces." (Parentheses in original.)

If one were to assume that the participation rate remains at 66.2% (which is about the rate that the BLS had been reporting for years up through mid 2008), then 66.2% of 244,350,000 (the civilian noninstitutional population in December of 2012) would produce a civilian labor force estimate of 161,759,700. This is 6,248,700 higher than the BLS's reported figure for the civilian labor force, 155,511,000. That is, this is about 6 million people without jobs, but who are no longer being counted as unemployed. Many of these people have searched for work, but given up in frustration. Some have resigned themselves to premature retirement.

143,305,000 (total employment in December of 2012) divided by 161,759,700 (adjusted civilian labor force in December of 2012 using a 66.2% participation rate) produces an employment rate of 88.59%, and hence, an unemployment rate of 11.41%. This is, of course, substantially larger than the 7.8% unemployment rate reported by the BLS.

There also exists the argument that the decrease in the participation rate is not due to changes in BLS accounting procedures, or weakening labor demand in the US, but rather it is a natural consequence of demographic changes in the US. Under this argument the participation rate is declining because the work force is getting older, and older people do not work as much. That is, an increasing percentage of the work aged people are in age categories for which the participation rate is lower. This is a reference to baby boomers reaching their 50s and 60s.

The participation rate was around 59% from the late 1940s through the early 1960s. It then grew for over three decades, as women entered the work force. However, this monumental labor demographic shift only caused the participation rate to grow by 8 percentage points in over 30 years. The participation rate has dropped by 2 1/2 percentage points in just 4 years. This suggests something more than variations in the birth rate is causing the drop in the participation rate -- namely, decreasing demand for labor in the US.

See also, TLJ table titled "U.S. Civilian Labor Force Participation Rate: January 1948 through December 2012: Seasonally Adjusted".

Also, historical data shows that decreasing participation in the labor force does not naturally follow during and after recessions. For all but three of the recessions since 1948, the participation rate held steady or increased during recessions. This held for the four recessions of the 1970s and 1980s. Moreover, after these recessions, the participation rate then grew.

The 1990 recession marked a change. The participation rate dropped during that recession. However, it resumed its growth afterwards. With the 2001 recession, the rate dropped during the recession, and then continued to drop for several years afterwards. This bears out the popular understanding of the years after that recession as a jobless recovery. The unemployment rate dropped, in significant part, because people left the workforce.

The most recent recession follows the same pattern, but in much greater magnitude. The participation rate dropped by about one percentage point in the 2001 recession and its aftermath. The rate has already dropped 2 1/2 percentage points for the most recent recession. Moreover, it could continue to drop much further.

A few have suggested that the BLS may be adjusting its data collection and analysis methods to bring down the unemployment rate, for political reasons. However, the BLS and other federal government units that collect economic data, such as those in the Federal Reserve System and the Department of Commerce, enjoy reputations among economists for objective and non-partisan work.

It might be noted though that the BLS has engaged in policy driven fact finding in at least two areas in recent years. Although, both of these are minor, and lie outside its core responsibilities. First, the BLS has been reclassifying jobs as green jobs, without cause, in order to enable the Obama administration to claim that it is fulfilling campaign promises to create green jobs. The BLS has also played politics with data on disability employment. The Congress enacted the Americans with Disabilities Act (ADA) in 1990, in part, to increase employment of disabled persons. However, during the 1990s, economists published research papers in peer reviewed economics journals that reported the results of econometric analysis of employment and disability employment data collected by government agencies. The papers demonstrated that the ADA had caused a decrease in disability employment. The BLS asserted (during the Bush and Obama administrations) with little basis that those studies were wrong. It basically disavowed the government's own survey results regarding disability status.

However, for the purposes of this commentary, it is not important to determine how consistent, or how objective, the BLS has been in calculating the unemployment rate and the participation rate.

Regardless of how the BLS classifies people, the fact remains that there is a huge body of people who are able bodied, mentally fit, educated and trained, who want to be working, but are not. Also, while the BLS has the power to shift these people outside of the workforce for its counting purposes, it does not have the power to remove these people from voter registration roles, or to preclude them from participating in political processes. Without the commitments of employment, these people have plenty of time to vote in every primary and general election, and participate in more time consuming political activities.

There are millions of persons whose jobless state does not add to the BLS calculation of unemployment rate. Nevertheless, they may be living under reduced financial circumstances, and without the non-financial rewards of being part of a work team. They may be living in unwanted retirement, forgoing many things for which they had long planned. These are unwanted and unpleasant outcomes for these people.

There are many psychological and social consequences of creating a increasingly large body of such people. Most do not relate to technology related areas of law and policy. However, it is possible that many of these people, and the politicians who represent them, will blame foreign competition and trade for their status.

People who loose jobs, or cannot find jobs, often do not assign responsibility to themselves. Also, government policies may harm labor markets. However, politicians are adept at claiming credit only for things that benefit some, and diverting blame for things that harm others. Politicians looking for votes may look for blamable targets in foreign governments, foreign companies, foreign workers, and US companies that buy, invest, manufacture, outsource, or hire abroad.

The tech sectors are inherently international, and dependant on both imports and foreign sales. Tech companies, and their investors and workers, and consumers of tech goods and services, that are available today, or have yet to be invented, benefit from free trade.

US tech companies, like many farmers and ranchers, and other sectors, urge their elected officials to pursue free trade policies. There have long been groups that argue for closed or protectionist policies. The growth of a huge body of recently employed people, as reflected by the BLS's plummeting participation rate, may result in an increasing chorus for protectionist or anti-trade policies that would harm the IT sectors and consumers.

(Published in TLJ Daily E-Mail Alert No. 2,505, January 8, 2012.)