The (Maybe Not So) Simple Arithmetic of Unemployment and Labor Force Participation

I have precisely zero interest in jumping into any fray from the before and after of Wednesday’s Wall Street Journal opinion piece by Jack Welch, wherein he defends his previous comments on the reliability of reported unemployment statistics. But there is one particular statement in that editorial that offers up what is sometimes called a teachable moment, to wit,

By definition, fewer people in the workforce leads to better unemployment numbers.

By definition, that’s not really correct. Consider a really simple example. Suppose:

Population = 200

Number of Employed People = 92

Number of Unemployed People = 8

Labor Force (Employed + Unemployed) = 100

In this example the labor force participation rate is 0.50 (the labor force divided by the population) and the unemployment rate 0.08, or 8 percent (the number of unemployed divided by the labor force).

Now suppose that five people drop out of the labor force (which would mean that labor force participation would decline from 0.5 to 0.475). What happens to the unemployment rate? Well, it depends what those 5 people were doing before they left the labor force. If they were unemployed, then unemployment falls to 3, the labor force falls to 95, and the unemployment rate is about 3.2 percent (or 0.0316 times 100). But if the 5 people who dropped out the labor force had been previously employed, the unemployment rate would actually rise to about 8.4 percent (because the number of unemployed would still be 8, but it would now be divided by 95 instead of 100).

Hope that clears it up.

Note: You can take a look some actual data on flows into and out of employment, unemployment, and not in the labor force here.

This post was originally published at Macroblog and is reproduced here with permission.

One Response to "The (Maybe Not So) Simple Arithmetic of Unemployment and Labor Force Participation"

  1. benleet   October 13, 2012 at 8:34 pm

    I did some digging on the same question, but I compare the rate of growth of three groups, the "working age population", the labor force and the employed. Not as Welch says, "fewer people in the work force" but slower growth in the work force relative to the other two groups.

    The Bureau of Labor Statistics report for Sept. 2011 to Sept. 2012 is here:
    It shows in the past 12 months 3.7 million joined "working age" population, a gain of 1.5%.
    The labor force increases by 1.041 million, a gain of 0.7%. This is the key number.
    In a normal year the labor force would have increased by 2.4 million, a gain of 1.5%.
    The number employed increased by 2.4 million, a gain of 1.7%. So the number of jobs more or less equals the normal new labor force growth.
    In a "normal" year the labor force would increase by 64%, not 28%, so people are dropping out. The labor force would have increased by twice this year's number in a normal year. In this last year only 43% of expected normal new labor force entrants entered, and 57% either dropped out or did not enter labor force. Labor participation dropped from 64.2 to 63.6%, while employed to population rate stayed low, moving from 58.5% to 58.7%, far from 64.4% in 2000. If we had the same employment to population rate as 2000, then 14 million would now be working, an almost 10% increase in the number now working.
    So 65% of the increase in "working age" population is also the number of new jobs, 2.4 million, job creation is matching normal entrance into labor force, while the labor force is growing at half its normal rate. The number looking for work increases by 800,000 or 3.1%, a bad showing. And the headline number unemployment drops from 8.8% to 7.8%. How do you increase the number looking for work and also lower the unemployment rate? You lower the rate of growth of the labor force. What I look for is another number: private sector employment. Google "data bls private sector employment". It shows that in November 2000 there were more private sector jobs than in September 2012, 12 years ago. The working age" population has increased by 31 million or 14.6%, and the total private sector employment has increased by 0%. That shows how weak the economy really is. My blog, I drew from the report by the Chicago Political Economy Group for this comment.