Don't Shoot the Messenger-Hire More of Them!

New unemployment numbers were released last week and at first glance it appears we are heading in the right direction.  However, as I have written before in "Employed or Unemployed?", the important statistic is not how many are unemployed.  What is really important is how many Americans are actually employed.

The following chart shows the labor participation rate.  That is the % of Americans working compared to the total working age population (ages 18-64).  The unemployment rate just considers those who are actually seeking work currently.  It excludes students, housewives, retirees and those that have just become discouraged and are no longer even trying to get a job.  For example, a 55 year old who is laid off is counted as unemployed as long as her unemployment benefits are paid but is considered retired when the benefits stop.  Even though she may be interested in continuing to work she would be considered retired by the statisticians in calculating the unemployment rate.

The labor participation rate was actually at its lowest point in 27 years in December at 64.0%.   Last December it was 64.3%.   The long-term average is 65.8% since 1980 (the dotted red line above).  This would seem to be fairer measure of the level of those who actually are interested in participating in the labor force.  Using this as the baseline, the real implied unemployment rate is 11.4% rather than the 8.5% that was reported last week as Zero Hedge points out.

What is particularly interesting is that the labor participation rate for men is down to almost 70%.  This is probably the lowest level of employment by working age males in U.S. history.  This chart from the Bureau of Labor Statistics tracks the labor participation rate since 1948 by gender with males (blue), females (pink) and the overall rate (black).

Labor Participation Rate by Gender

1948-2011

The official stats state that about 13 million Americans are unemployed.  Zero Hedge calculates that the real number of unemployed is probably closer to 18 million if you assume the historical average labor participation rate since 1980.  That is a big difference.  In fact, as Tyler Durden of Zero Hedge points out, America would officially have a 0% unemployment rate based on the way the Bureau of Labor Statistics is calculating the unemployment rate if the labor participation rate dropped to 58.5%.  Such is the lunacy of the way the unemployment rate is being presented.  Keep your eye on the labor participation rate rather than the unemployment rate to determine whether things are improving.

James Pethokoukis of The American Enterprise also cautions that we should be very cautious in thinking that we have turned the corner on unemployment.

Those headline economic numbers are terribly misleading, hardly reflecting the devastation most Americans still see every day. An 8.5 percent unemployment rate? Please. If the size of the U.S. labor force was as large as it was when Barack Obama took office, the unemployment rate would be 10.9 percent. But since so many people have gotten discouraged and stopped looking for work– and thus disappeared by government statisticians — the jobless number has been artificially depressed. A better gauge of the jobs picture is the broader U-6 rate, which includes part-timers who would rather have full-time jobs. It stands at a whopping 15.2 percent.

This chart from ShadowStats.com shows the official unemployment rate, the U-6 rate (gray line) and the estimate of ShadowStats of what the unemployment rate would be if all long-term discouraged workers were included in the labor base pool (blue line) compared to the official rate (red line) .

Another interesting statistic buried in the job numbers was that out of the increase in 200,000 jobs in December, 42,000 were in one job category---"couriers and messengers".  There must have been a lot of helpers hired by Santa during the month.  Can this trend continue?

We need to create at least 120,000 jobs per month just to accommodate new entrants into the workforce going forward.  The 200,000 new jobs that were created in December is encouraging but there is a long way to go.  I am going to remain cautious until I see the labor participation rate increasing rather than get excited about a declining unemployment rate.