So how should we look at today’s jobs report — as good news since the number of jobs we are losing is slowing significantly, or as bad news since the unemployment rate is jumping?
Personally I think that the number of jobs is the more significant of the two, since the data is more reliable and because it is the number of jobs that actually drives the economy. The unemployment rate is a lagging indicator of the economy while the number of jobs lost or created is closer to being a coincident indicator.
The graph below shows both the unemployment rate as well as the year-over-year percentage change in employment. Based on the unemployment rate, things were actually worse in the 1982 recession, but in terms of employment growth, this downturn has been far worse than anything seen in the lifetimes of anyone but the most senior of senior citizens.
I would also point out that this is following an economic expansion that was particularly anemic in the rate of job creation relative to any other recovery. Also note that in the last two recessions the unemployment rate peaked long after the recession was finally over.
Still, even if we focus on the jobs numbers rather than the unemployment rate, the fact still remains that we are losing jobs. I think the graph below shows the two sides of the picture well. It is the same total payroll data, but on the red line and the left hand scale it is looking at the year-over-year rate of job loss (or gain historically) while the blue line and the right hand scale shows the month-to-month change.
Clearly we have made great progress if one just looks at the month-to-month progression, but on a year-over-year basis, things are as ugly as ever. That has as much to do with last year as this year. Prior to the financial markets seizure a year ago, the monthly pace of job losses had been more or less what we had seen in previous downturns. Then the bottom fell out.
The only month that historically even came close to the rate of job losses we were seeing last fall and winter was December 1974, when the economy lost 602,000 jobs. The five months between November and March (inclusive) were really unprecedented, with drops of 597,000 then 681,000 then 741,000 then 681,000 and then 652,000, for an average of 670,000 jobs lost per month over five months. Last month’s decline of 216,000 is less than one third of that average.
Given that unemployment can cause a vicious circle of people losing income, so they spend less, so businesses have to lay off more workers, that sort of reduction is a very significant achievement.
I would like to turn my attention now to two measures of the job market that do not get anywhere the amount of attention that they deserve. The first is the civilian participation rate, or the percentage of the population that actually wants to work — all the people with jobs and the unemployed.
It is not at 100% because we have things like child labor laws, so your 2-year-old is not considered unemployed. Stay-at-home parents are also not considered to be participating in the work force, nor are people who are retired.
It is shown on the blue line in the peach colored graph below. Notice two things about it. The first and most obvious is that starting in the mid-1960’s the participation rate started a long secular uptrend that lasted until about the end of the century. This was due to two things. The first is that back in the 1960’s, if you ever saw the words “women” and “labor” in the same sentence, the article was probably about childbirth. Clearly that is no longer the case.
While men are still more involved in the workforce than women (housewives are still much more common than househusbands) their participation rate is 75.0% for men 20 years old or older, while for women it is 60.8%. That is still higher than participation rate was for the whole population back in the 1960’s.
The other factor causing the participation rate to rise was the Baby Boomers. In the 1960’s they were still kids, and thus not part of the labor force. When they entered the labor force in the 1970’s the participation rate started to shoot up.
However, the secular uptrend in the participation rate appears to have reversed, falling from its peak of 67.3% in April of 2000 to its current level of 65.5%. There is also a tendency for the participation rate to flatten out or decline during bad economic times. Thus I’m not sure how much of the current decline is cyclical and how much is secular.
However, if you refer back to the first graph, you will notice that the unemployment rates were generally higher in the 1970’s and 1980’s — regardless of where we were in the economic cycle — than they were in either the 1960’s or in the 1990’s and 2000’s.
For more than a decade from the mid-1970’s until the 1980’s, it was extremely rare for the unemployment rate to drop below 6%, despite often extremely robust job creation. By contrast, job creation so far this century, even before the current recession, was, to put it bluntly, godawful — yet the unemployment rate rarely exceeded 6%.
The change in the participation rate is the reason for this. The economy had to work much harder to keep the unemployment rate down in the 1970s than it has had to so far this century. When you consider the change in the participation rate that was occurring, Jimmy Carter has gotten a very unfair rap on his handling of the economy, and Bush’s performance was even worse than you thought (not to be too partisan about it, since this consideration would also upgrade the performance of Reagan, and make Clinton’s performance somewhat less than commonly believed).
The other related measure that the press really needs to start to pay a lot more attention to is the employment to population ratio, or as I like to refer to it, the employment rate. In many ways the employment rate is more significant than is the unemployment rate (the difference between the two lines is the unemployment rate).
After all, one way or another, it is the people who are working who have to support those who are not working, and many hands make the load lighter. Obviously, the employment rate is much more volatile and cyclical than is the participation rate.
The decline in the employment ratio has been huge since the peak in April of 2000 at 64.7%. It now stands at 59.2%, its lowest level since March 1984. The decline has been particularly sharp since the recession began, falling from an interim peak of 63.4% in December 2006, and it was still as high as 62.9% as recently as January 2008.
However, it never got close to the highs of the late 1990’s. With the impending retirement (if they can afford it) of the Baby Boomers, it seems unlikely that we will ever get back to the Clinton-era highs (well, who knows what will happen in 2050).
Like a lot of other employment measures, the employment rate tends to hit bottom after the recession is over, but the length of time after the recession was over was particularly long after the last two recessions. Thus, even if the recession is over, it is likely that the percentage of people bringing home paychecks is likely to decline for some time to come.
This is important since it is jobs that bring in income. In terms of household income it really doesn’t matter if one spouse is not working because they want to raise their kids, or because they have been laid off. It is not a question that is asked by the cashier at Wal-Mart (WMT); they just want to know if you have the cash to pay for your stuff.
Employment is particularly critical this time around since the consumer is already so far in debt. Major credit card lenders like Capital One (COF) and American Express (AXP) have been cutting credit card limits.This is understandable from their perspective, since if someone is going to declare bankruptcy because they are out of work, COF would much rather have then do so when they owe $2,000 rather than when they owe $10,000.
The other source of credit people used to be able to use to tide them over when they were out of work was home equity. Very few people have significant home equity any more, and millions are underwater. So that simply is no longer an option.
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