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Wednesday, February 17, 2016

Is There a Conspiracy to Protect Obama’s Record?

How Economists Measure Unemployment

Even as many Americans continue to experience a very slow recovery from the Great Recession, the official unemployment rate has dropped below 5 percent, leading some to credit presidential policies for that positive sign. In response, some critics of President Obama have taken to social media to suggest that the official unemployment numbers are “lies,” part of an intentional conspiracy to hide the real state of the economy.

Their argument is based on the claim that the unemployment figures don’t count people who have given up looking for work or who are working under the table. The critics claim that those numbers, which no one is talking about, have risen and should be included in the unemployment rate.

These critics are correct to point to an increase in the number of people not in the labor force or engaged in part-time or unreported work. That increase may well be related to the poor policy choices of the last seven years. But the numbers aren’t lies, the decrease in the number of people seeking work isn’t a secret, and there is no conspiracy to boost the current administration’s record. The way these data are reported reflects how economists have measured unemployment for decades.

Labor Force Ins and Outs

To understand what’s going on, we need to clarify some basic definitions. The first distinction economists make is whether a person is in or out of the labor force. Being “in” the labor force means that you are interested in paid employment and are actively looking for work or have a job. So, for example, stay-at-home parents and retired people are not in the labor force.

We define unemployed as those people who are in the labor force but not currently employed. That is, you are unemployed only if you do not have a job and are actively looking for one. (The Bureau of Labor Statistics has some specific criteria to determine “actively looking” that need not concern us here.)

The unemployment rate is the number of people unemployed divided by the number in the labor force. So those out of the labor force (the retirees, for example) figure in neither the numerator nor the denominator. The unemployment rate tells us what percentage of people who would like to work (as indicated by actively looking) do not have jobs.

Labor Force Dropouts

We have a separate measure that tries to account for those who have stopped looking for work: the labor force participation rate, defined as the number of people in the labor force divided by the population age 16 or older. So, for example, if large numbers of people in the labor force decide to retire, all else equal, the labor force participation rate falls.

The BLS has several variants on the unemployment measure, including one that tries to account for “marginally attached workers.” These are workers who are working part-time but wish to be working full-time. A separate unemployment measure includes that group. All of these are reported each month.

So what has happened in the last few years of the Obama administration? We have indeed seen the unemployment rate fall, as a smaller percentage of those seeking work are unable to find it. But at the same time, the labor force participation rate has fallen significantly.

The downturn illustrated at the right end of this graph began in the middle of 2008 and has continued for the almost eight years since. There has been much debate in economics over the explanation. There was a slower decline that began around 2000 that has been attributed to demographic and economic changes that increased the number of retirees, but the post-2008 decline is a clear intensification of that longer-term trend. It does seem to be significantly due to people who have stopped looking for work after long periods of unemployment. The data on the duration of unemployment largely support that interpretation, as more people have remained unemployed for longer periods in this recession and recovery than in earlier ones. These labor force dropouts are known as “discouraged workers.”

The rise in discouraged workers can make it trickier to interpret the unemployment rate. To take one example, suppose there are 100 million people in the labor force and 5 million of them are unemployed, giving us a 5 percent unemployment rate. Now, suppose 1 million of those unemployed people give up looking and drop out of the labor force. Now we have 4 million unemployed out of a labor force of 99 million. That gives us an unemployment rate of 4.04 percent.

Ever More “Discouraged Workers”

Some might want to celebrate the good news of falling unemployment, but I think most would agree that it’s hardly good news when a million people give up looking for work. This is one reason why unemployment statistics are accompanied by the data on labor force participation. Contrary to the claims of the more conspiratorial critics, both the BLS monthly update and mainstream media like CNN are reporting both numbers.

It is fair to say that the last few years have seen exactly this combination of falling unemployment and falling labor force participation rates as unemployed workers seem to be leaving the labor force in steady numbers. This withdrawal of labor might well reflect mismatches between worker skills and the new jobs being created, but it also might be the result of ongoing policy errors that have made hiring workers more expensive. These include anything from the Affordable Care Act (ACA) to Dodd-Frank to higher minimum wage laws to the Obama administration’s anti-business rhetoric.

The ACA may also be responsible for an increase in the number of part-time workers who would like full-time work, as its rules provide incentives for firms to limit individual workweeks to fewer than 30 hours. Celebrating the falling unemployment rate as a victory for Obama-era policies is fraught with complications.

How Do We Measure Discouragement?

Some might argue that we need to count the discouraged workers in the unemployment rate. The problem lies in deciding how to distinguish between workers who have dropped out because they are discouraged and those who have left the labor force because their salary expectations are higher than what the market offers — or because they value highly the unpaid work they might be doing.

For some people, it’s a combination. What of the discouraged construction worker who couldn’t find work, so he became a stay-at-home dad when his wife got a raise and they decided they wanted another kid? What of the financial manager who lost his job in the recession, unsuccessfully looked for a new one for a bit, and then decided instead to retire? If we try to explain labor force exits by people’s motives, we somehow have to figure out what those motives are and then sort out the multiple considerations in play.

Perhaps we should just keep doing what we’ve done. After all, there’s a real value to keeping economic data as consistent as possible over time so that we can make historical comparisons. The issues I’ve laid out here are well known to those who follow the economy, and the media and government are not trying to hide or distort them.

Perhaps if the public understands economic data just a little bit better, we can move away from accusations of deceptions and conspiracies and cover-ups and get more serious about changing economic policy in ways that will reduce the number of marginally attached, discouraged, and unemployed workers.

  • Steven Horwitz was the Distinguished Professor of Free Enterprise in the Department of Economics at Ball State University, where he was also Director of the Institute for the Study of Political Economy. He is the author of Austrian Economics: An Introduction.