Not In the Labor Force

There are lies, damn lies - and statistics.
    —attributed to Benjamin Disraeli, made popular by Mark Twain

Humankind can not bear too much reality
    —T.S. Eliot

Some of us think America is in Big Trouble.  The often sarcastic way I cast doubt on government unemployment statistics today may strike you as negative in the extreme, and in a way it is. But the real dilemma we face is simple: are we going to address deep structural problems in our economy? Or are we going to keep lying to ourselves about those problems? How long are we going to pretend they don’t exist?

President Obama has proposed another band-aid stimulus to create jobs. Rather than level with the American people about the extraordinary difficulties we will have in getting people back to work over the next decade, the President would rather pretend that throwing another dollop of borrowed money at the jobs problem will somehow fix it.

I believe Americans have to own up to the difficulties they face to have any chance of fixing them. Bear this in mind as I reveal the extraordinary lengths we go to to put an optimistic spin on a truly ugly jobs situation. Looking on the bright side, I don’t think we have to worry about a resurgence of oil demand in the United States for a very, very long time.

An Optimistic BLS Report

The Bureau of Labor Statistics (BLS) reported that the unemployment rate fell to 10% (from 10.2%) in November. This number, called the U3 in their monthly reports, is the official, "headline" number. Optimists were out in force after the BLS release. The Great Recession is over! they proclaimed. Some traders increased their bets that the Fed will raise short-term interest rates soon on the assumption that unemployment has peaked.

Even members of the NBER, which officially calls the beginning and end of recessions, figured the trough was probably in (Bloomberg, December 4, 2009).

Payrolls fell by 11,000 workers in November, less than the most optimistic forecast among economists surveyed by Bloomberg, figures from the Labor Department showed today in Washington. The jobless rate declined to 10 percent.

“Today’s report makes it seem that the trough in employment will be around this month,” Robert Hall, who heads the National Bureau of Economic Research’s (NBER) Business Cycle Dating Committee, said in an interview. “The trough in output was probably some time in the summer. The committee will need to balance the midyear date for output against the end-of-year date for employment" [to call the end of the recession].

If the NBER does indeed call the end of the recession as having occurred sometime in the 2nd or 3rd quarters of 2009, it won't be because we've reached the bottom in unemployment. All those fond of reality anticipate a prolonged jobless recovery with very high unemployment rates, as I explained last week in refuting Paul Krugman's fantasies about above-trend economic (GDP) growth over the next decade.

This week I will put the BLS' November jobs report under the microscope, incorporating some observations from outside observers about what it means and touching on some other worrisome longer-term trends in the last section. It's far too early to put on the party hats and break out the champagne about a bottom in unemployment. But if you're unemployed or under-employed, you know that already.

A Statistical Anomaly?

The BLS announced that 11,000 jobs were lost in November, a far cry from job losses earlier in the year. Still, we must ask along with Calculated Risk if the economy lost jobs, why did the unemployment rate decline?

Calculated Risk chalks up the discrepancy to a statistical anomaly. The BLS uses two separate surveys to measure jobs lost or gained on the one hand, and the unemployment rate of the other.

In August, when it was reported that the July unemployment rate dipped slightly to 9.4% from 9.5% in June, I pointed out that the dip in unemployment was just monthly noise: Jobs and the Unemployment Rate

FAQ: How can the unemployment rate fall if the economy is losing net jobs, especially since the population is growing?

This data comes from two separate surveys. The unemployment Rate comes from the Current Population Survey (CPS: commonly called the household survey), a monthly survey of about 60,000 households.

The jobs number comes from Current Employment Statistics (CES: payroll survey), a sample of approximately 400,000 business establishments nationwide.

These are very different surveys: the CPS gives the total number of employed (and unemployed including the alternative measures), and the CES gives the total number of positions (excluding some categories like the self-employed, and a person working two jobs counts as two positions)...

[T]he jobs and unemployment rate come from two different surveys and are different measurements (one for positions, the other for people). Some months the numbers may not seem to make sense (lost jobs and falling unemployment rate), but over time the numbers will work out.

[My note: The CPS is the household survey. The CES is called the establishment (payroll) survey.]

How stupid is this? Does it seem reasonable to call a trough in unemployment and the end of the Great Recession based on noise in the unemployment data? And what about this statistical alternative?

Gluskin Sheff’s David Rosenberg takes note of a little known ... calculation the BLS does, the “adjusted” household survey, which tries to reconcile the establishment and household surveys. According to that figure, the nation lost 109,000 jobs in November.

“This may well be the nugget that everyone missed because the Household Survey does a much better job at picking up what is happening in the small business sector,” Rosenberg wrote.

In adjusting the household survey to be more "similar in concept and definition" to the establishment survey, the government agency discovered that 109,000 jobs were lost, not 11,000. But they released the lower of the two numbers to the public. At the very least, the BLS could have made the public aware of the differing statistical interpretations of their data.

Alternative Measures

The BLS provides alternative measures of the unemployment rate in their Table A-12. I am interested in contrasting the U3 measure, which is the "official" rate, with the U6, which includes the so-called marginally attached and the involuntary part-time workers —

Marginally attached workers are persons 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 recent past [in the last 4 weeks]. Discouraged workers, a subset of the marginally attached, have given a job-market related reason for not looking currently for a job. Persons employed part time for economic reasons are those who want and are available for full-time work but have had to settle for a part-time schedule.

I consider the U6 to be a far more important indicator of what the true unemployment situation is because it includes all those adversely affected by the Great Recession.

One might think that the decrease in the official rate would have been offset by an increase in the broadest U6 measure as people who could not find work stopped looking for work for one reason or another. However, the BLS also lowered the U6 to 17.2% from 17.5% in October. 

Typically, the more important U6 measure is ignored. For example, a Google U3 news search "unemployment rate 10%" got 20,278 hits on December 7, 2009. The U6 search "unemployment rate 17.2%" got only 1,483 hits.

If God designed the Universe, Life on Earth and Everything Else, why did He burden us with so many oblivious people? This is yet another ultimately destructive form of denial, of course.

Not In the Labor Force

Mike Shedlock (Mish) of Global Economic Trends Analysis takes a different tack than Calculated Risk does in explaining why both the unemployment rates fell while 11,000 jobs were lost. He notes a rise in the number of people who are counted as not in the labor force (Figure 1 and definition from the BLS.)

Figure 1 — Major indicators of labor market activity, seasonally adjusted from the BLS November, 2009 report. All numbers in thousands. Mish says "Table A explains the drop in the unemployment rate nicely.
Unemployment dropped by .2% even though 11,000 jobs were lost and it should take at least 100,000 jobs just to keep up with demographics. Instead note the drop in the civilian labor force by 98,000. Moreover, those "not in the labor force rose by 291,000 constituting nearly all of the decline in unemployment."

Definition from the BLS — Persons who are neither employed nor unemployed are not in the labor force. This category includes retired persons, students, those taking care of children or other family members and others who are neither working or seeking work. Information is collected on their desire for and availability for work, job search activity in the prior year, and reasons for not currently searching.

If you add Not in the labor force (82,866) to Civilian labor force (153,877) as shown in Figure 1 to get the total 236,743, and then divide employment (138,502) by the total, you get the participation rate (Figure 2).

Figure 2 — The participation rate from Calculated Risk. "This is the ratio of employed Americans to the adult population. The general upward trend from the early '60s was mostly due to women entering the workforce. This measure was flat at 58.5% in November; this is the lowest level since the early '80s. The Labor Force Participation Rate fell to 65.0% (the percentage of the working age population in the labor force) [divide the civilian labor force (153,877) by the total (236,743)]. This is the lowest since the mid-80s."

It is important to observe that both the total and labor force participation rates are still falling off a cliff at a time when some observers are celebrating a bottom in job losses. Both rates should be rising, not falling if the economy is really recovering. Both Mish and Calculated Risk make related points about this.

... in a typical recovery, the participation rate should go up not down. The reason is people hear there is a recovery, hear things are getting better, hear the talk about "green shoots" and think there might be a job if they go looking [Mish]

When the job market starts to recover, many of these people [who are not participating] will reenter the workforce and look for employment - and that will keep the unemployment rate elevated for some time [Calculated Risk]

Let's look within the increase in those who are not counted as in the labor force. Recall that the U6 includes the marginally attached and part-timers. The BLS says the number of part-timers was about the same as in October, so we can ignore that number (but look at Dave Rosenberg's remarks at the end).

The number of marginally attached workers, who are a subset of those not in the labor force, also decreased in November month-over-month (Figure 3).

Figure 3 — Marginally attached workers (in thousands) since 1999 (not seasonally adjusted). Marginally attached workers decreased by 50,000 in November. The number of marginally attached has been rising in fits and starts since the 2nd quarter of 2008.

This decrease in the marginally attached was not due to a decrease in the number of discouraged workers—that number increased (not seasonally adjusted) as shown in Figure 4.

Figure 4 — Discouraged workers (in thousands) since 1999 (not seasonally adjusted).  Discouraged workers increased by 53,000 in November. Obviously this is not a good thing.

The decrease in the marginally attached was due to a decrease (-103,000) in those not looking for work for reasons other than discouragement, a catch-all category which includes

... those who did not actively look for work in the prior 4 weeks for such reasons as school or family responsibilities, ill health, and transportation problems, as well as those for whom reason for non-participation was not determined

If the number of marginally attached decreases, the U6 unemployment rate will fall as well, all else being equal. For the life of me, I can not figure out where these people went. Like the Desaparecidos ("the Disappeared") of Argentina's Dirty War in the late 1970s and early 80s, they have simply dropped off the Face of the Earth.

The problem arises because we don't know why people are no longer counted as being in the labor force.

Where did the formerly marginally attached go? Some of the missing 103,000 people may have been listed as discouraged in the latest survey, but that can not account for most of them. Did they retire? Did they go back to school? Are they taking care of the kids? Are they living in a cardboard box under a bridge? Where did they go?

A shrinking labor force is inconsistent with an economic recovery story. Falling participation is expected in a job market that has been terrible going on 2 years now. Clearly, survey data can be skewed when people have been unemployed for a very long time, as we have seen during the Great Recession.

According to the BLS, there are a record 5.887 million workers who have been unemployed for more than 26 weeks (and still want a job). This is a record 3.8% of the civilian workforce.

The currently or formerly marginally attached—don't you love that phrase?—have been forced to get on with their lives in a different way. They must adapt, they must move on as best they can. What other choice do they have? When they do move on, the BLS decides they are no longer in the labor force.

Thus we get the following BLS pathway for American workers as the Great Recession drags on:

1. Employed
2. Officially Unemployed (counted in the U3)
3. Marginally Attached (counted in the U6, but not in the U3)
4. Not in the Labor Force (not counted in the U6 — "the disappeared")

I can not peer inside the BLS Black Box, but if you decrease those in the labor force, and decrease the number of those who are marginally attached within that group, it is certainly possible, depending on how you juggle the numbers, for the U6 rate to decline even though the total number of those who need work actually increased in the Real World.

And the fact that the number of discouraged workers increased by 53,000 should have raised a Big Red Flag for optimists interpreting the BLS results.

The BLS has provided us with an object lesson in how to lie with statistics. Let's move on.

Funny Business With Private Sector Job Losses

I've been pretty easy on the BLS up to now. My attitude about government statistics goes rapidly downhill from here.

The BLS November report showed an increase of 7,000 government sector jobs. Since the overall job loss was 11,000, we must conclude that the private sector lost a grand total of 18,000 jobs. That certainly does not jibe with the conclusions of private data collectors Automatic Data Processing and TrimTabs—

Private-sector jobs in the U.S. fell 169,000 last month, according to a national employment report published Wednesday by payroll company Automatic Data Processing Inc. and consultancy Macroeconomic Advisers...

The latest ADP report showed large businesses with 500 employees or more shed 44,000 jobs and medium-size businesses lost 57,000 workers in November. Small businesses that employ fewer than 50 workers cut 68,000 jobs. Service-sector jobs fell 81,000, and factory jobs dropped 44,000...

In another Wednesday job report, TrimTabs Investment Research estimated that job losses fell to 255,000 last month, compared with 284,000 reported for October.

"The unemployment rate could easily hit 11% by early next year," said Charles Biderman, chief executive of TrimTabs.

TrimTabs uses daily income-tax withholdings to the U.S. Treasury to estimate changes in employment. TrimTabs also estimates -- based on daily income tax deposits -- that wages and salaries fell 4.6% year-over-year in October and 5.3% year-over-year in November.

So which is it? Is it minus 18,000 (BLS) or minus 169,000 (ADP) for the job tally in the private sector? These numbers are much too far apart to be reconciled. Whose numbers should we believe? Should we believe ADP’s payroll data or BLS establishment survey?

MFR’s chief economist Joshua Shapiro says:

[The BLS number] is contrary to virtually all other evidence concerning the labor market, including a survey by ADP which is based on hard data from a much larger sample. Because the government’s report this month is an outlier, we are not prepared to throw in the towel on our expectation of a second consecutive “jobless recovery.”

We also must bear in mind that private firms compiling jobs data have no incentive to issue inaccurate reports. I can think of plenty of reasons why the government might want to put a positive spin on unemployment, especially the day after the President holds a Jobs Summit to brainstorm ideas for creating paid work in America. The Comedy Channel's Jon Stewart was so impressed with the Obama gabfest that he said "from now on, hand jobs and blow jobs count as actual jobs." This also seems to be the view of the BLS.

Of course, the BLS is probably not consciously fudging the numbers. They may be subtly influenced or simply incompetent.

And let's not forget that Business Week economist Michael Mandel notes that “over the past 10 years, the private sector has generated roughly 1.1 million additional jobs, or about 100K per year. The public sector created about 2.4 million jobs.” This lamentable trend continues. (This is item #7 on The List from my Krugman article.) Perhaps one day we'll all be working for the government. And then we can tax ... each other?

The Birth/Death Model

The BLS employs a so-called birth/death model to estimate business start-ups and failures. (So, it is the birth and death of businesses that matters, not individuals.) 

In 2008, the CES sample includes about 150,000 businesses and government agencies drawn from a sampling frame of Unemployment Insurance tax accounts which cover approximately 390,000 individual worksites. The active CES sample includes approximately one-third of all nonfarm payroll workers.

The sample-based estimates are adjusted each month by a statistical model designed to reduce a primary source of non-sampling error which is the inability of the sample to capture, on a timely basis, employment growth generated by new business formations. There is an unavoidable lag between an establishment opening for business and its appearing on the sample frame and being available for sampling.

Because new firm births generate a portion of employment growth each month, non-sampling methods must be used to estimate this growth. Earlier research indicated that while both the business birth and death portions of total employment are generally significant, the net contribution is relatively small and stable. To account for this net birth/death portion of total employment, BLS uses an estimation procedure with two components...

[My note: If you want the grisly details, follow the link above.]

As Mish invariably says in his monthly unemployment update—

After the typical in January [of 2009] in which the Birth/Death Model revisions bore some semblance of reality, the birth/death numbers remain in deep outer space.

If you would like to visit outer space, look at Figure 3 and Figure 4.

Figure 3 — A graph of the birth/death data from 2004-2009 (November), courtesy of Jesse's Café Américain. You can see that the 2008 & 2009 numbers are in line with previous years, which indicates that the BLS has not adjusted their model to take the Great Recession into account.

Figure 4 — The actual birth/death adjustments for 2009 courtesy of Mish.

You can see in both graphs that there's always a huge adjustment downward in January right after the holidays. (Next month is January.) Otherwise, the months are all positive with the birth/death model adding 1,179,000 jobs in the period February through November. The net for 2009 is +823,000.

However, Mish points out that BLS jobs numbers are seasonally adjusted while birth/death numbers are not. Thus it is not possible to simply add or subtract birth/death numbers to the totals the BLS reports. And thus we don't know exactly how many fictitious jobs the birth/death model added to the BLS's establishment (business payroll) survey in 2009. Here's what a person who scrutinizes the BLS reports had to say about it—

[Errors] may come from the bureau’s calculations about new business creation, which results in the relatively notorious “birth/death adjustment.”Jeffrey Miller at A Dash of Insight explores the methodology behind the monthly jobs report, and comes to this conclusion: the methodology missed some important trends.

The BLS, essentially, guesses at job creation, extrapolating from job destruction. The “residual,” as Miller calls it, is the birth/death adjustment. “For many years this residual was stable,” he writes. “The most recent test against the state data indicated a significant error, showing that the BLS estimates have been wrong for nearly a year, especially since 1Q09.”

“Something important happened at the start of the year - probably the loss of credit available to new businesses,” he says. “The strong historical relationship used by the BLS finally broke down.  Without a good estimate of job creation, the BLS monthly change is suspect.”

This total fiasco requires little additional comment from me. This is, however, an opportune time to point out that the BLS makes a benchmark adjustment every year. The coming adjustment will not be gentle.

The benchmark revision represents a once-a-year re-anchoring of the sample-based employment estimates to full employment counts primarily available through unemployment insurance (UI) tax records that nearly all employers are required to file with State Employment Security Agencies...

The preliminary estimate of the next benchmark revision is for a downward adjustment of 824,000, or 0.6 percent of total non-farm employment, for the March 2009 reference month. The final benchmark revision will be incorporated into the payroll survey with the publication of January 2010 data on February 5, 2010.

If I'm reading this right, the huge downward revision will be reflected in the January data, but it really doesn't matter which month's data reflects the change. Adding 0.6% to November's 10.0%, we would get a sudden boost to 10.6% early next year. I wonder how those saying we have hit the bottom in unemployment are going to spin this one.

Kudos to the BLS for admitting (in part) their past errors.

More Temp Workers For the Holidays

The BLS took note of the usual holiday surge in temp workers. 

Employment in professional and business services rose by 86,000 in November. Temporary help services accounted for the majority of the increase, adding 52,000 jobs. Since July, temporary help services employment has risen by 117,000.

I like that—"professional and business services." Figure 5 shows us that holiday hiring was better this year than last year.

Figure 5 — From Calculated Risk's Seasonal Retail Hiring article. He says "Retailers are hiring seasonal workers at slightly above the pace of last year ... Typically retail companies start hiring for the holiday season in October, and really increase hiring in November... This really shows the collapse in retail hiring in 2008. Retailers only hired 54.2 thousand workers (NSA) net in October. This is essentially the same as in 2008 (59.1 thousand NSA). However retailers hired 321.3 thousand workers in November (NSA), an increase from the 233.7 thousand last year. This suggests retailers are a little more optimistic than last year."

The only thing I can say is that seasonal holiday workers hired in the 4th quarter of 2009 will very likely be fired in the 1st quarter of 2010.

Summing Up This Sad Situation

If you think things look grim for next year, get a load of what David Rosenberg thinks as reported in Chicago Tribune's Obama's unemployment challenge (November 12, 2009).

Gluskin Sheff economist David Rosenberg estimates that the unemployment rate is going to 12 or 13 percent, and the number, alone, is not as disconcerting as Rosenberg’s long-term concerns over the record 6.2 million permanent jobs cuts during this recession. Unlike the past, when companies laid off people during downturns and then brought them back to work as sales picked up, now many jobs presumably have just vanished. Companies, with the aid of technology, have learned to do more with less and< factories have closed....

Rosenberg notes that many of the jobs that were created between 2001 and 2008 were “related either directly or indirectly to the parabolic extension of credit" and consumers paying off their debts rather than borrowing more money, with Wall Street unable to sell the bond-concoctions that took the economy down, those jobs are unnecessary...

[My note: This latter point is one of the reasons why I always going on and on about debt levels in America.]

It gets worse.

Although 11 million full-time jobs have been lost, many people have been shifted through no choice of their own to part-time work amid cutbacks. So the unemployment rate doesn’t reflect the full story. Now, Rosenberg notes, “a record 9.3 million Americans are working part-time because they have no choice. In past recessions, that number rarely got much above six million.”

The federal government keeps unemployment statistics called the U6, and they reflect the underemployed along with the unemployed... That measure – which includes the part-timers -- is at 17.5 percent. So if you throw the unemployed into the statistics, as the U6 does, the nation’s job problems are worse than the 10.2 percent unemployment rate suggests.

And why does it matter that 17.5 percent are underemployed or unemployed? Because employers are likely to move their existing workers from part-time work to fuller-time work before hiring any new workers. As a result, people who are completely out of jobs are going to have a harder time finding work and months of job-looking could be very difficult.

[My note: Bravo Chicago Tribune! Reporter Gail Marksjarvis has discovered the U6 unemployment rate!]

I am in agreement with Rosenberg. Many of the jobs lost are essentially never coming back, or at least not for a very, very long time.

Perhaps I'm being too negative. Surely there is some good news in here somewhere. I found the Silver Lining at The Onion. It's in Figure 6.

Figure 6 — From The Onion's Available Labor Rate Increases: "In what is being touted by the Labor Department as extremely positive news, the nation's available labor rate has reached double digits for the first time in 26 years, bringing the total number of potentially employable Americans to an impressive 15.7 million. "This is such an exciting time to be an employer in America," said Labor Secretary Hilda Solis, adding that every single day 6,500 more citizens join America's growing possible workforce. "There's such a massive and diverse pool of job-ready Americans to choose from. And each month the number only gets higher..."

Christina Romer, chair of the White House Council of Economic Advisers, says that "the President's view of [the decrease in official unemployment to 10%] was that [this] was better than expected but certainly not good enough." As I mentioned at the top, the President came up with the usual solution—

President Barack Obama called for a major new burst of federal spending Tuesday, perhaps $150 billion or more, aiming to jolt the wobbly economy into a stronger recovery and reduce painfully persistent double-digit unemployment.

If the President wants to lower the unemployment rate, a new stimulus package of $150 billion is not likely to do it. However, why spend this newly borrowed money when you've got the Bureau of Labor Statistics on the case? I'm quite certain they are up to the task of lowering the unemployment rate all on their own. You don't even have to pay them extra to do it!

If we’re going to spend money we don’t have, we should spend it on benefits for the unemployed to make sure no one goes hungry. Don’t spend it on short-term jobs growth fantasies. Until our political leaders and Americans in general start addressing the threat of prolonged high unemployment, the jobs situation will slowly but surely deteriorate as we engage in endless, pointless public debates over things—new government jobs programs, NBER end-of-recession calls—that don’t matter.

Contact the author at dave.aspo@gmail.com