Recent debates regarding the health of the U.S. economy have included questions about how the U.S. unemployment rate is calculated. For instance, the U.S. Bureau of Labor Statistics (BLS) calculates a monthly unemployment rate in the U.S. by dividing the number of unemployed adults (age 16 to 65) who are still looking for work by the sum of both the total number of employed persons and this number of unemployed adults who are still looking for work. Some adults are not in the unemployment rate, including people are not able to work, such as disabled persons. Most important, however, is the fact that the unemployment rate does not include adults who have stopped looking for work. How do we know what the real unemployment rate is? How many adults who are able to work are both unemployed and not included in the unemployment rate? At the very least, this problem makes the unemployment rate potentially insufficient for gaining an accurate measure of the health of the U.S. labor market. So, in our current economic climate is the unemployment rate a good barometer of the health of the U.S. labor market?
Many economists argue that a better barometer of the health of the U.S. labor market is the labor participation rate. The labor participation rate is essentially the percentage of the total number of adults who can work who are actually employed. Another term for this number might be the U.S. employment rate. It is the percentage of all adults age 16 and older who are actually employed. Let’s consider for a moment the history of the U.S. labor participation rate, and ask whether or not the U.S. labor market is showing signs of genuine recovery since the crash of 2008.
After the end of World War II, from 1945 to 1963, the U. S. labor force generally held at a steady labor participation rate or employment rate of around 59%. After 1963, however, a steady rise in the employment rate of the U.S. labor force began an unprecedented forty-five year growth in the size and active participation of American labor in the overall U.S. economy.
From 1963 to 1990, the average employment rate grew from 58.7% in 1963 to a high of 66.5% in 1990, despite several recessions during these years. The U.S. recession of the early 1990s resulted in a slight retreat from this trend, but by the end of 1994, a return to this trend became clearly evident. By 1996, this long trend in U.S. labor growth peaked at a labor participation rate of 67.1%, followed by a flat plateau of 67.1% for four full years, despite the economic growth at the time.
After September 11, 2001, however, the U.S. employment rate began a gradual, albeit minor decline for nearly a decade, sliding from a rate of 66.8% in 2001 to 66.0% in 2008. Given the collapse of the tech market after 2000, the tragic events of 9/11 in 2001, the Enron and MCI/ WorldCom collapses of 2003, and the financial burdens of two expensive Middle East wars, this slow decline in the U.S. employment rate might be seen more as a signal of a slight to moderate weakening of the U.S. economy than a necessary long term trend regarding the future of the U.S. labor market. Indeed, without the economic collapse of 2008, this 0.8% gradual decline over eight years might have been seen merely as a plateau in the labor market due to critical economic stressors during the period.
Unfortunately, more serious economic issues emerged in late 2007 and 2008, resulting in a major crash of the U.S. stock market in late 2008. The crash, which followed a serious weakening of the U.S. housing market, was sparked by the collapse of several major financial companies, most importantly American Insurance Group (AIG), as well the powerful investment firms of Bear Stearns and Lehman Brothers. What followed was a panic in the global market, leading to further erosion of titan companies like auto giant General Motors.
To slow the downward spiral of world markets and the U.S. economy, U.S. President George W. Bush initiated a near-trillion dollar rescue package known as TARP (Troubled Asset Relief Program). Despite this effort, it took President Barak Obama's administration and the Federal Reserve Bank nearly another trillion dollars in 'stimulus' as well as two 'quantitative easing' efforts to stop the bleeding and stabilize the U.S. economic situation.
This attempt at remedying the woes of the U.S. economic system, however, did little to stop a precipitous drop in the U.S. employment rate. The U.S. economy shed jobs after the crash of 2008 at a rate unseen since the late 1920s and early 1930s. And despite all protestations to the contrary, the shedding of jobs in the U.S. economy steadily declined from early 2009 until January 2012, which U.S. Bureau of Labor Statistics’ labor participation rates clearly reveal (http://data.bls.gov/pdq/SurveyOutputServlet). The U.S. labor participation rate dropped from 65.7% in January of 2009 to 63.7% in January of 2012, two full percentage points. The last time the U.S. saw a consistent labor participation rate this low was 1979 to early 1981. In fact, it took a full decade of vigorous economic expansion during the 1990s to increase the U.S. labor participation one percentage point. It could well take unprecedented economic growth beyond anything we've ever seen to recover these losses even in two decades. This is something to ponder.
Finally, the serious weakening of the U.S. labor market over the last four years notwithstanding, some pundits today, desperate for good news on the economy, believe the slide may be coming to an end. The first quarter of 2012, they argue, seems to indicate a small but positive change in the U.S. economy, given that the labor participation rate grew from 63.7% in January to 63.8% in March 2012. Unfortunately for the optimists, the most recent labor report (April 2012) revealed a labor participation rate of 63.6%, which marks a continuation of the steady decline in the U.S. employment rate since early 2009. Clearly, whatever other economic indicators may reveal, the U.S. labor participation rate is showing no signs of improving, which, pardon the pun, is definitely a troubling sign. In fact, for all the talk of an improving economy by the Obama administration, this one indicator at least is shouting that something is rotten in Denmark… um … in the American economy. Hang on to something, folks. The rough ride doesn’t seem to be going away any time soon. And if the European economic crisis doesn’t stabilize soon, things may get even rougher over here.
---- David Adcock, Managing Editor
