May 5, 2014

The Media’s Reporting of the April Unemployment Rate – A Little Knowledge Can Be Dangerous

Economists have “trained” the media to quickly check out what has happened to the labor force when the unemployment rate declines. If the unemployment rate drops and so, too, does the labor force, then the decline in the unemployment rate might not be a signal of a strengthening labor market. Rather, under these circumstances, the decline in the unemployment rate might reflect potential workers becoming discouraged over the lack of employment opportunities and, therefore, dropping out of the labor force. I emphasize “might” because a decline in the labor force does not always reflect an increase in so-called discouraged workers. And, in fact – well, fact may be too strong a word, but according to data contained in the April Household Employment Survey – the number of people not in the labor force in April but who did want a job changed by a big fat ZERO. But the mainstream media, financial or general, did not report this. Rather, they reported that the 0.4 point decline in the April unemployment rate was suspect because labor force dropped by 806 thousand, implying that thousands must have exited the labor force because of poor job prospects.

When the “highlights” of the monthly employment report are first reported on CNBC and Bloomberg TV, complete with the six frames of “experts”, and a report like April’s is released with a decline in both the unemployment rate and the labor force, the first thing Ilook at in Table A-1, Employment Status of the Civilian Population, of the Household Employment Survey is the line “Persons who currently want a job”, which is a subcategory of the line above it, “Not in the labor force”. As I mentioned in the preceding paragraph, the number of people who were not in the labor force in April but who also currently wanted a job changed by zero from March. So, although a one-month’s decline in the labor force of 806 thousand is, indeed, an anomaly, another datum obtained from the same survey indicates that this decline in the labor force was not due to potential workers dropping out because of poor job prospects.

The second thing I look at after a monthly employment report similar to April’s is released is Table A-15 in the Household Employment Survey, “Alternative Measures of Labor Underutilization”. Specifically, I look at the U-5 measure of measure of the unemployment rate, “Total Unemployed plus Marginally Attached Workers as a percent of the Civilian Labor Force plus All Marginally Attached Workers”. (Persons marginally attached to the labor force are those who currently are neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime in the past 12 months. Discouraged workers, a subset of the marginally attached, have given a job-market related reason for not currently looking for work.) So, the U-5 unemployment rate definition accounts for those unemployed potential workers who currently desire a job but have stopped looking for employment. If the “headline” unemployment rate, technically, the U-3 definition in Table A-15, declines and the U-5 unemployment rate declines by a similar magnitude, then one can deduce that the decline in the headline unemployment rate was not due to potential workers dropping out of the labor force because of a lack of employment opportunities.

The chart below shows the month-to-month change in the labor force along with the month-to-month changes in the headline unemployment rate and the U-5 definition of the unemployment rate. In April, the 806 thousand person decline in the labor force was accompanied by a 0.4 point decline in both the headline and U-5 unemployment rates. Because the U-5 unemployment rate includes those who have dropped out of the labor force but who currently do desire to work and because this measure of the unemployment rate declined by the same magnitude as the headline measure, we cannot infer that the 0.4 decline in the headline unemployment rate was somehow “tainted” by people dropping out of the labor force due to bleak job prospects, as many in the media did infer.

In December 2013, the labor force dropped by 347 thousand, accompanied by a 0.3 decline in the headline unemployment rate and only a 0.1 point decline in the U-5 unemployment rate. Thus, in December 2013 in contrast to April 2014, I would surmise that part of the decline in the headline unemployment rate was related to people who wanted to work dropping out of the labor force in December.

In the 12 months ended April 2014, there has been a 0.5 point net decline in the labor participation rate, the civilian labor force as a percent of the civilian noninstitutional population. In these same 12 months, there has been a 1.2 point net decline in the headline unemployment rate. Given the decline in the participation rate, a statistic that the media has been trained to focus on when interpreting a decline in the headline unemployment rate, can we conclude that the decline in the headline unemployment rate overstates the improvement in labor market conditions because potential workers are choosing not to “participate” in the hunt for jobs due to weak job prospects? No, because in these same 12 months there has been a 1.3 point decline in the U-5 unemployment rate, which accounts for labor force dropouts due to weak job prospects.

It remains a mystery as to why in April the labor force plunged by 806 thousand and why the labor participation rate fell by 0.4 points. Looking at changes in the participation rate by age categories, it is revealed that the largest April declines were concentrated in the 16-to-24 year old cohort. Perhaps a light when on in the brains of our youth, alerting them to the value of education and inducing them to stay in or go back to school. I don’t know. But what I do know from the data in other parts of the Household Employment Situation Survey is that the bulk of the declines in the April labor force and participation rate was not due to people suddenly deciding to sit on their couches and eat Cheetos all day because job prospects were so bleak in April.

Perhaps I am being too critical of the media for not being more diligent in analyzing the monthly employment data. After all, I do not recall any economist interviewed by the mainstream media mentioning that the U-5 unemployment rate also fell by 0.4 points in April, thereby ruling out the notion that the headline unemployment rate fell because workers dropped out of the labor force because they were so disheartened by weak job prospects. If the “experts” the media turn to for analysis do not examine and/or understand the relevant sections of the employment reports, how can I really expect the media to accurately report the economic news?

Paul L. Kasriel

Econtrarian, LLC

Senior Economic & Investment Advisor

Legacy Private Trust Co., Neenah, WI

econtrarian@gmail.com

1-920-818-0236

http://www.the-econtrarian.blogspot.com