I know what you’re thinking: “Just three?”
I love graphs as much as the next guy, but I’ve squished what you need to know about the labor market into three graphs, courtesy of the St. Louis Fed’s FRED database.
I’ve said before that it annoys me when the single piece of data the news media uses to assess the economy is the unemployment rate, which is subject to misinterpretation, misunderstanding, and survey error. Much better to look at real (and per capita) GDP, net private investment, the inventory-to-sales ratio, or even basic indicators like the Conference Board’s Leading Economic Index. These all reflect actual business activity of production and sales.
It needs to be constantly stressed that jobs are the result of economic activity, not the cause. If we wanted to put people to work it would be extraordinarily easy: instead of yard guys using riding mowers, string trimmers, and blowers, use scissors and brooms. “But,” you say, “they wouldn’t get as much done!” Ah, true, but to maintain the same amount of business the company would have to hire a lot more workers, right?
So, our priority should not be on whatever policy or program will increase jobs, but on what will increase economic activity and entrepreneurship. Do that, and the jobs will come.
But, it’s useful to watch the labor market as a lagging indicator of the economy, so here are my promised three graphs:
1: Population & Labor Force. Over the past decade, the US population (blue line, left axis) has steadily increased as expected. In an economy operating normally, the number of people willing and able to work (the labor force, red line/right axis) would increase at a similar rate. But, as you can see, since the recession (gray area) began around 2008 the number in the labor force has stalled. In other words, an increasing number of people in the population are deciding (whether they want to or not) to not look for work. (It is possible that an increasing number of people in the population are not able to work too.) This is verified by
2: Labor Force Participation Rate & Not in the Labor Force. The participation rate (green line, right axis) is the percent of the civilian noninstitutional population that is in the labor force. It has tumbled about three percentage points and doesn’t appear to be turning up. This means that more people are out of the labor force (red=men, blue=women, left axis; FRED doesn’t have total not in the labor force), which can be seen by the increased rates of the red and blue lines. Why are people leaving the labor force? They could be retiring, they could be choosing not to work because a spouse has a steady job and they are satisfied with a single income, or (as is more likely) they could have given up looking for a job. In which case, they drop out of the labor force.
Be aware that the unemployment rate only reflects people in the labor force; it is the percent of people in the labor force who are not working for pay at least one hour a week. If a bunch of people decide that their job prospects are so crummy that they stop looking, they stop being unemployed and they stop being in the labor force. So what about the number of people remaining in the labor force? Graph #3 tells the story:
3: Total Nonfarm Employees & Total Unemployed. In my above example where unemployed people leave the labor force, the unemployment rate would actually decrease (usually indicating good times) since the drop in the numerator (# unemployed) would be relatively larger than the drop in the denominator (# in labor force). So, this percentage can move in unusual ways and should be interpreted with caution. For a clearer picture, we can look at the actual numbers of people employed and unemployed.
Doing that, we see that the number of employees (blue line, left axis) is about 4.5 million below the 2008 peak. While it took two years for employment to fall 9 million, the following two years have only made up half of the drop. The total number of unemployed people (red line, right axis) has risen from its past-decade low of about 6.7 million in Oct. 2006 (and stayed around 7 million until Dec. 2007) to about 15.4 million three years later, and stands at about 12 million in Sep. 2012. While it took three years for the number of unemployed to increase about 8.7 million, in the following three years it only dropped about 3.4 million.
Say what you will about the present administration inheriting a recession (one fueled in part by government policies strong-arming banks to increase homeownership rates, hence loosening lending requirements) of which it had no part; the evidence strongly suggests that it has done little to boost the labor market even after the recession bottomed out. You might cut a President some slack in letting unwise investments get liquidated and the recession to run its course, but the test of an administration’s economic policies should then be judged by the pace of the recovery.
Let me be clear: there is precious little that President Obama or a President Romney can do to “fix” the economy other than to get out of the way. Programs, special favors, cheap shots at China, none of those things accomplish anything of substance other than to shuffle jobs around. Jobs are created after business activity is encouraged, which itself is done by reforming institutions to better favor economic growth. The recipe for success isn’t difficult, either:
In the last 10 years, both African and formerly Communist nations—such as Rwanda, Malawi, and Ghana, and Romania, Bulgaria, and Albania—show the largest increases in economic freedom. Countries showing the biggest declines since 2000 include Venezuela, Argentina, Iceland, and the United States.