Labor Force Facts and Myths Explained

By Chad Karnes,

Shutterstock photo

On Friday 1/10/14 the U.S. Department of Labor released its "Employment Situation" summary with the following opening sentence, "The unemployment rate declined from 7.0 percent to 6.7 percent in December while total non-farm payroll employment edged up (+74,000)".  This sent bond prices (NYSEARCA:TLT) higher, and the U.S. Dollar (NYSEARCA:UUP) lower.

The Department of Labor's second sentence went on to proclaim that "The number of unemployed persons declined by 490,000 to 10.4 million in December".  For the year the Department of Labor states that 1.9 million Americans were no longer unemployed.  Well, not exactly.

The headline unemployment data is misleading, and unfortunately is wrongfully given much more attention than it deserves.

The Spin Cycle

The headline unemployment rate continues to decline (down from 7.6% in December 2012 to only 6.7% in December 2013), but this is due more to calculation nuances and definition gaming than to an underlying positive fundamental backdrop the media and others are claiming.

Headlines such as this one from United Press International earlier in the month continue to imply the unemployment picture is vastly improving.  "Unemployment Trend Positive in Most Cities" captures readers attention as the article goes on to explain that the "unemployment rate in 293 out of 372 cities was lower in November compared with the same month in 2012".

But headline unemployment rates are not what we should be focusing on as the meaningful information is buried one level deeper in the data.

Even former Fed Chairman Ben Bernanke himself suggested this back in July when he also questioned its usefulness.  "The unemployment rate probably understates the weakness of the labor market".

I concur.  Instead we should be looking more closely at employment rates, not unemployment rates, because they better portray the productive capacities and  income potentials of households.

The Devil is in the Details

The unemployment situation in America is similar to the housing one in which headline data continues to suggest positive outcomes, but the data behind the headlines suggests otherwise.  Back in May we were watching the housing market as headlines continued to pump the never ending rise in homeprices and homebuilder (NYSEARCA:XHB) stock prices.

On 5/30 in my article entitled, " Genuine housing recovery, or relief rally? " I spoke of the headline data that wasn't being confirmed by the underlying fundamentals.  We also alerted subscribers through our Technical Forecast getting out of housing and construction stocks (NYSEARCA:ITB).  Soon after, housing related equities and REITS (NYSEARCA:VNQ) fell over 10% through the summer as construction ETFs are still down from their highs and REITS (NYSEARCA:RWR) remain down 15% through today.

The official unemployment rate's equation is displayed below by the graphic and helps show how the rate is derived.

Unemployment Rate

The next two boxes show November's data compared to December 2013's numbers released 1/10/14.  Both the # of unemployed persons dropped, but also so did the total labor force.

Unemployment Rate Nov-Dec

Putting it all Together

The below chart shows the unemployment rate that has indeed been in decline (in blue), but it also shows a labor force participation rate in red that has also been declining, now below 155 million Americans.

A falling participation rate means more Americans are simply leaving the labor force, for whatever reasons, rather than gaining actual employment.   This nevertheless takes the unemployment rate down, as unemployment only counts those individuals "looking for work" and thus also are in the labor participation rate.

The latest controversy involves those long term unemployed which are losing their benefits and about to drop out of the labor force all together, driving the numerator of "unemployed persons" down significantly.  This will no doubt take the unemployment rate lower, but certainly will not make the employment situation in America any better as the falling rate deceptively implies.

labor force participation rate

This is one of the main problems with the unemployment rate as it is today.  Americans are simply leaving the labor force instead of finding jobs, yet the headline unemployment rate suggests this as a positive outcome.

The next data set below shows that the actual employment situation in America is worse than the headline unemployment rate suggests.

Employment versus Unemployment

Today the labor force participation rate as a % of all working age adults is 62.8%, shrinking from last year's 63.6% rate, and down significantly from the 66%+ rate seen throughout the 1990s and 2000s.

In fact the number of working age Americans over the age of 16 no longer in the labor force just hit an all time high of 91.8 million, up from 77.3 million in December 2006.  A rising number of citizens not in the labor force would be expected as an aging population retires, but the plethora of baby boomers has not yet started to retire, so this number should only be expected to go way higher, likely taking unemployment down with it.

The next chart shows this trend in red, but also shows the number of citizens actually employed in the United States in blue, still below 2007's peak of 146 million.

Citizens Employed

 Neither of these data sets adjusts for the growth in the U.S. population, though.  A growing population should have growing employment as well as a growing number of people leaving the workforce, so the data needs to be adjusted for population changes in order to compare them apples to apples.

Although the amount of citizens employed is growing and the amount of unemployed are shrinking as the above two graphs show, further data suggests the U.S. employment situation is not getting any better when looked at as a total percentage of the working population, in other words, on a per capita basis.

The chart below shows the "employment" rate compared to the "unemployment" rate since December 2006.

Employment Rate

More and more people are dropping out of the labor force, making the unemployment picture look better.  But a declining labor force also means the total employment picture in the U.S. is actually not getting any better.

The employment rate shows this and suggests the long term risks to growing household income, corporate revenues, and even GDP are still not being mitigated as more and more Americans fall out of the labor market, keeping jobs per capita at less than 59% of the working age population since 2009.  The number of Americans of working age actually employed continues to be stagnant when adjusted for the rise in our population.

The ETF Profit Strategy Newsletter utilizes technical, sentiment, and fundamental analysis to stay ahead of the usually misleading headline data.  Join us for trade ideas and investment insight into all the major capital markets.  We publish a monthly Newsletter, weekly picks, and a twice weekly Technical Forecast.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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