Today the Bureau of Labor Statistics released the October Unemployment Report, the last report before the general election on November 6^th. The report showed an uptick in the overall rate from 7.8% to 7.9%. As with every month, we delve into the numbers not commonly reported in the media, to get a better understanding of the employment situation.

1)      Workforce Participation Rate edges up .2 to 63.8%

There are two ways to read this data point, the first of which is that the rate has fluctuated between 63.5 and 63.9 for all of 2012. So while edging up slightly is a good thing in terms of the economy at large, it doesn’t show any really improvement. Essentially the labor market is in neutral.

The other way to read it, is that it is a sign of improvement as this is the second month in a row that the Participation Rate has increased. While it is certainly possible that this is an indicator that a recovery is starting, there are two points that are cause for concern. Early 2010 saw the same magnitude of growth, albeit over 3 months with a plateau in the middle. This slight improvement however was followed a slide that continued until this year. In addition, as mentioned above, 63.8% is still within the range seen for all of 2012.

There is too little data to make the argument that the job market is recovering, based on this data point alone. Were it to move 64.0 and experience sustained growth getting there, then the argument could be made, but with the available data it cannot.

2)      Household Data shows number of Unemployed Increased by 200,000,

Despite the number of jobs added to the economy, the number of people considered to be unemployed actually jumped by 200,000, although this number seems to be related to some discouraged workers re-entering the labor force. Coincidentally the number of people not in the labor force, but would like a job also dropped by 200,000. While it is improbable that these groups of 200,000 are completely one in the same, it stands to reason that there is at least some amount of overlap.

3)      Household Data shows number employed increased by 400,000 but Establishment Data shows 171,000 jobs created. What is the disconnect?

Last month the Bureau of Labor Statistics came under fire for reporting that the number of employed had jumped by nearly 800,000, an unrealistic number given the state of the economy. While some have charged that it was politically motivated, the more likely answer was a statistical fluke in the data. Fluke or not, it is indirectly used to calculate the unemployment rate, which resulted in the surprise drop in September.

Likewise for October, it seems unlikely that 400,000 were added, given the state of the economy. Putting that figure into question even more so is the disconnect with the Establishment Data, which showed an increase of 171,000 jobs. The cause of the gap is two-fold, one is that the Household data is a smaller sample, resulting in a higher margin of error and that the number employed also counts part-time, non-benefit providing jobs. For these reasons it is the Establishment Data number cited in media reports for total jobs numbers.

The Revised Rate: (Methodology)

Taking into account workers no longer in the work force, but would like a job, the unemployment rate would be: 9%, down from 9.1% in September.

Josh Elliott-Traficante

October 2012

The official unemployment rate has come under fire as of late. The past year has given rise to the charge by many that the unemployment rate under represents the true state of unemployment. Many have cited the U-6 rate which is currently around 14.0%. (For a description of the different rates, click here) The recent drop in the unemployment rate to 7.8% in September brought charges of manipulation for political motives.

While it seems highly unlikely that the Bureau of Labor and Statics is deliberately ‘cooking the books’, there is something to be said about the under representation of the true state of unemployment. This is not to say that the Bureau is doing this on purpose, but rather it is a symptom of the sluggish recovery that is not captured in the data. (For an explanation of the disconnect click here.)

As the recovery of the past two years has only been tepid, at best, a number of individuals have dropped out of the workforce entirely, because they think that they cannot find work, so they do not bother trying. Under the current method of calculating unemployment, these people do not exist. Despite not being counted, they are still unemployed.

However, there is a way to capture these group and project what the unemployment rate would be, were they counted as unemployed. Using historical baselines, thereby only counting those not in the workforce due to the recession, it is possible to calculate the unemployment rate if they were included. When this is done, the unemployment rate for September would be 9.0%.

Below is a chart comparing the revised rate to the official unemployment rate:

The difference between the two rates grows slowly, albeit steadily as the recession began, only to widen drastically by early 2009. As the recession bottomed out and the slow recovery began, this spread has grown only wider to the current 1.2% point spread in the September data.

Though there is some wiggle room in the revised rate (see Methodology below), this is decently accurate way of incorporating those not in the work force, for reasons realistically attributable to the recession, into the unemployment rate.

Methodology

In addition to counting those no longer in the workforce, the BLS also counts those no longer in the workforce, but want a job. Currently this subset stands at roughly 6.7 million. Looking back at the historical data, we find that even in good times there are people who fall into this category, for whatever reason.

The running average for this group of people between 2000 and the end of 2007 was just over 4.7 million. This subset remained within a fairly narrow band of the average; 96% of the monthly data points were within one standard deviation of it. In other words, during both the recession of the early 2000s as well as the recovery that followed, the total number of people who were not in the work force, but wanted a job, remained fairly consistent. This consistency over 8 years is key, as it gives the perfect baseline.

Using that 8 years’ worth of monthly average as the pre-recession base line, that number is then subtracted from each following month’s reported number of those ‘not in the workforce, but would like a job.’ The resulting difference is (attributable to the recession), is then added back into the labor force data for the month, as well as the total number of unemployed. These revised numbers now include those unemployed persons who have left the workforce due to the recession. The numbers are then divided, resulting in the revised unemployment rate.

x = Number of persons reported as “Not in the Workforce, but would like a job”

y = Revised Number of persons reported as “Not in the Workforce, but would like a job”

x – 4.714 million = y

                y + Total Number of Persons in Labor Force

——————————————————— = Revised Unemployment Rate

               y + Total Number of Persons Unemployed

Accounting for one standard deviation in either direction from the average of 4.7 million, yields only minor changes, a testament to the lack of movement in the data. Taking this into account, there is a band +/- .2% points above and below the revised rate.

According to preliminary data from the Bureau of Labor Statics, New Hampshire’s unemployment rate increased from 5.4% to 5.7% for the month of August.

As with the national unemployment rate released by the Bureau, the unemployment rate is only one of many data points published in the monthly jobs report. The data not commonly discussed in media reports however, often tells more about the true nature of the jobs market than the unemployment rate alone does. Following in the model of our analyses of the national jobs reports, below are three takeaways from the New Hampshire report:

1) Unemployment has risen from 5.0% to 5.7% since May.

This increase represents the loss of roughly 1000 non-farm payroll jobs. With a total of 626,000 employed, this is the lowest level since October of 2010. Since the beginning of the year, the state has lost roughly 3700 jobs. Compounding the job loss is the decline of the Civilian Labor Force, one of the data points used to calculate unemployment. This point is expounded below.

2) Only 2 sectors saw payroll growth, most declined or stayed flat.

The Bureau divides job types into 11 broad categories and tracks the monthly change in the number of those employed in each sector. Over the time frame of May to August where the .7% increase occurred, only two sectors grew, Financial Activities, which added roughly 500 jobs and Government which added 1700. Several sectors remained flat, while Construction and Manufacturing each lost 700 jobs a piece, Professional and Business Services lost 800 while Education and Health saw the greatest loss with 2400 jobs being cut. It is also important to keep in mind that remaining flat is almost the same as decline with the natural growth of the population is taken under consideration.

3) The New Hampshire’s Civilian Labor Force has Fallen Back to Recession Lows, Mirroring National Trends

The Civilian Labor Force, after having grown every month from its lowest point in June of 2011 has now returned to those lows. Since peaking in May, the Labor Force has fallen by more than 5000. Though New Hampshire is a greying state, the size and speed of the drop cannot be attributed to retirements or other demographic trends. Rather, it is indicative of people dropping out of the labor force all together, having given up looking for work. This recent dip indicates that there the level of confidence in the recovery is falling.