The labour Department’s Bureau of labour Statistics says the “official unemployment rate” is now 7.8%, the first time it has been below 8% since January 2009.
But is that an accurate read on the health of the U.S. labour market?
There’s been a huge drop in the labour force participation (LFP) rate since the start of the Great Recession and continuing through the supposed recovery. That’s due to both the ageing of the Baby Boomer generation and discouraged workers dropping out of the work force.
Here is one way to look at it: Back in 2008, the Congressional Budget Office estimated the LFP rate would be 65.4% in 2012 vs. 66.1% that year, a decline largely in response to the ageing of the baby boom generation, whose members are beginning to approach typical retirement ages.
Instead, it is 63.6%. You could assume the difference in the two numbers partly represents the Discouraged Worker Factor. In addition, it also probably factors in the huge expansion in people on Social Security disability:
Disability recipients may account for as much as 0.5 percentage point of the more than 2 point drop since the end of 2007, the economists calculate, and that contribution could grow when some extended unemployment benefits expire at the end of this year.
Interestingly, here is what former Obama White House economic adviser Austan Goolsbee said about this issue back in 2003:
But the unemployment rate has been low only because government programs, especially Social Security disability, have effectively been buying people off the unemployment rolls and reclassifying them as “not in the labour force.” In other words, the government has cooked the books. It has been a more subtle manipulation than the one during the Reagan administration, when people serving in the military were reclassified from “not in the labour force” to “employed” in order to reduce the unemployment rate. Nonetheless, the impact has been the same.
Research by the economists David Autor at the Massachusetts Institute of Technology and Mark Duggan at the University of Maryland shows that once Congress began loosening the standards to qualify for disability payments in the late 1980′s and early 1990′s, people who would normally be counted as unemployed started moving in record numbers into the disability system — a kind of invisible unemployment. Almost all of the increase came from hard-to-verify disabilities like back pain and mental disorders. As the rolls swelled, the meaning of the official unemployment rate changed as millions of people were left out.
The point is not whether every person on disability deserves payments. The point is that in previous recessions these people would have been called unemployed. They would have filed for unemployment insurance. They would have shown up in the statistics. They would have helped create a more accurate picture of national unemployment, a crucial barometer we use to measure the performance of the economy, the likelihood of inflation and the state of the job market. …
The situation has grown so dire, though, that we can’t even tell whether the job market is recovering. The time has come to correct the official unemployment statistics to account for those left out. … Otherwise, announcements about a rebounding economy will continue to show only half the picture. Despite the blistering growth of the economy, the invisible unemployment problem continues.
Also note that Goolsbee called the 2006 Bush economy one of “blistering growth.” Anyway, Goolsbee’s comments give credence to the idea that the real unemployment rate isn’t 7.8%.
Once you factor in discouraged workers and those folks benefiting from looser Social Security disability standards, the real unemployment rate, discounting the demographic factor, is likely around 10.4%. And given that many cash-strapped Baby Boomers may have reconsidered retirement due to falling wealth and want to find work but can’t, it could be closer to 11%.
If the LFP was the same as when Obama took office, the U-3 rate would be 10.7%. And don’t forget that the broader U-6 rate remains at 14.7%.
UPDATE: As I said on Twitter, I am not saying that Goolsbee was suggesting some nefarious intent here, just highlighting how Washington typically goes about its business.