Thursday, July 19, 2012

Improving Jobless Claims Hide Real Story

A number of pundits argue that President Obama's reelection prospects rest largely on the employment market. Some predict that unless the unemployment rate falls to below 7.0% by November, an unlikely outcome, he won't get reelected. Today we learned that initial jobless claims jumped up 34,000 to 386,000 for the week ended July 14. Despite the increase, the Obama camp can at least make a case that initial jobless claims have improved significantly since they took control of the White House in January 2009. The number peaked at 667,000 for the week ended March 28, 2009, but as shown in the graph below, things have certainly been moving in the right direction ever since.

Unfortunately, the situation looks much worse when you examine the employment participation rate. This figure has dropped from 65.7% in January 2009 to just 63.8% in June 2012.

To put this decline in context, the civilian noninstitutional population over the age of 16 totaled 234,739,000 in January 2009, of which 154,236,000 million were in the labor force. Since then, the population has grown by 3.6% to 243,155,000, but the labor force has grown by just 0.6% to 155,163,000. In other words, had the labor participation rate remained constant, there would be approximately 4.6 million more individuals in the labor force.

Where did all these people go? They simply dropped out. Because the employment market is so bad, some gave up looking for work. Others "chose" to retire early. Still others decided to stay in school, hoping things would improve by the time they got yet another degree. The official unemployment rate of 8.2% is bad enough, but if we were to account for the missing 4.6 million, the unemployment rate would be a much higher 10.9%. It is not the improving trend in initial jobless claims, but the deteriorating labor participation rate that tells the real story about the dismal state of the U.S. employment market.