Stop equating low unemployment with high employment

There’s always a lot of excitement around unemployment statistics these days. With near-historic lows and the talk of “full employment,” there’s plenty to celebrate and trade in nonfarm payrolls statistics and Department of Labor press releases. But the problem with all the hype around these numbers is that they too often mix things up that shouldn’t be mixed. Like, say, mangoes and frogs, or apples and moths.

Take a look at the following data:

Yes, unemployment is low. The civilian unemployment rate is currently at 3.7% seasonally adjusted (June 2019) and the unemployment rate for: 20 years and over, at 3.3% seasonally adjusted. On a 3-month average basis, the last time we saw comparable levels of civilian unemployment was in 1969, and the 20+ unemployment rate was in 2000. Kind of cool, but also telling: historic lows in unemployment require the measure of civilian unemployment to be confirmed. Which means that taking into account government employment, things are a little less impressive today. But let’s not break our hair.

Here’s the problem, though: record levels of unemployment are not on par with employment records. In fact, low unemployment does not mean a high employment rate.

To see this, look at the solid red line, plotting the employment rate for the population aged 20 and over. The measure currently stands at 71.2% and the average for the last three months is at 71.1%. Neither is historically impressive. In fact, both are below all months (excluding recessions) for 1990-2008. In fact, which is not shown on the graph, we would have to go back to 1987 to see the same levels of employment rates as today. Whoops…

But why is low unemployment not synonymous with high employment? Well, because of a series of factors, the main one being participation in the labor market. It turns out (as also shown in the graph above), that we are close to historical (for the period of the modern economy) low in terms of people wanting to work or looking for a job. In other words, we are at historic highs in terms of disillusionment with the prospect of looking for a job. Damn! The “best unemployment statistics ever” and the worst “willingness to look for a job ever”.

The labor force participation rate in the United States is 62.9% (62.8% for the average of the last three months). And it has continued to fall since the peak of the 1st quarter of 2000 (at 67.3%).

When we estimate the relationship between the employment rate and the two potential factors: the unemployment rate and the activity rate, historically (since the 1970s) and in the period of the modern economy (since 1990) as well as In more current times (since 2000), and since the end of the Great Recession (since 2010), several things stand out:

  1. The unemployment rate is weakly negatively correlated with the employment rate, or in other words, decreases in the unemployment rate are associated with small increases in employment, over all periods;
  2. The activity rate is strongly positively correlated to the employment rate. In other words, small increases in the participation rate are associated with larger increases in employment; over all periods;
  3. The labor force participation rate, in the magnitude of its effect on the employment rate, is about 14 to 15 times bigger the effect of the unemployment rate on the employment rate over all periods; and
  4. The relatively larger impact of the participation rate on employment, compared to the impact of the unemployment rate on employment, has actually increased (but not statistically significantly) over the past 9 years.

These points combined mean that you really need to start paying more attention to the actual job creations and employment rate, as well as the participation rate, than the unemployment rate; and this suggestion is more relevant to today’s economy than it has ever been in any other period on record.

But above all, please Stop claiming that a low unemployment rate means a high employment rate. Bats aren’t cacti, mangoes aren’t moths, and CNN & Fox commentators aren’t really analysts.

Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.