Saturday, March 5, 2011

Employed Or Unemployed?

There was good news with the announced unemployment rate of 8.9% yesterday.  This is the lowest rate since April, 2009.  As recently as last November the rate was 9.8%.

However, a closer look at the underlying numbers suggests that we should temper any excitement over the numbers for the time being.  The most important number is the number that are employed, not the number that are unemployed.

The unemployment rate just considers those individuals who are actually seeking work. It excludes students, housewives, retirees and those that have just become discouraged and are no longer trying. For example, a 55 year old who is laid off is counted as long as her unemployment benefits are paid but is considered retired when the benefits stop.  Even though she may still be interested in continuing to work she would be considered retired by the statisticians in calculating the unemployment rate.

Many argue that a better measure of the employment situation is to look at the labor participation rate.  This shows the % of individuals who are working compared to the total working-age population.  Looking at this measure the February numbers actually show that fewer people are working as a % of the total population than at any time in the last 25 years-64.2%.  The average for the last 25 years has been 66.1%.  If this was used as the baseline for those looking for work (a reasonable assumption based on the last 25 years) the unemployment rate would be 11.6%.

For men in their most productive work years between 25 and 54, the labor participation is only 88.2%-the lowest it has been since this data was first collected.

A closer look at the numbers also provides some interesting insights.  For example, the percentage of those 55 and older who are working is at the highest level in almost 50 years.  40% of those age 55 or over are working.  This is almost ten percentage points higher than it was 15 years ago. Those working in the 20-24 age group has also dropped by about 10 percentage points in the last 25 years.  At the same time, the percentage of those 16-19 working is at record lows.  Only a third of this age group is employed.  In the late 1970's, almost 60% of this demographic was working.

If you break down the age 55+ demographic further you see that the labor participation rate has increased in all age brackets up to and including 75 and over in the last 25 years.  This is probably due to a number of factors-baby boomers at the lower end of this age demographic whose skills are needed in the workforce, lack of retirement savings and better overall health (and poor health options due to the high costs of pre-age 65 retiree health coverage).

What does this mean?  Keep an eye on the labor participation rate rather than the unemployment rate to get a better idea whether the economy is improving.  It is really about the percent that are employed than the percent that are unemployed that matters most.  

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