But is the labor market situation really improving that much? Recall how the unemployment rate is defined.
Start with the entire population (POP)
The Civilian Population (CIVPOP) is defined as the Population (POP) minus persons who are either
- under the age of 16
- in a correctional facility, residential nursing facility, or mental health care facility
- on active military duty.
The Civilian Labor Force (CIVLF) is defined as the Civilian Population (CIVPOP) minus persons who are jobless and also are not looking for a job. The Civilian Labor Force (CIVLF) is meant to define the pool of persons who are either employed or actively looking for work ie the active labor force.
The Civilian Labor Force (CIVLF) can then be divided into those who are currently employed (E) and those who are not employed but are looking for jobs and are available for work ie the unemployed (U).
Finally the Civilian Unemployment Rate is defined as U / (E+U) or alternately as U / (CIVLF)
While this definition may correctly represent the percent of potential workers who are actively looking for jobs it is less useful as a gauge of the health of the economy. First there is a small problem that the Civilian Labor Force starts by excluding those who are either below the age of 16, institutionalized,or on military duty. Over long periods the proportion of the population who fit into one of those categories can vary. That is more a long term trend problem though.
The much larger problem however is that persons who are jobless but NOT looking for jobs are not included in the Civilian Labor Force. Look at the definition of CIVLF again. And the proportion of persons who fall into this category can vary greatly over the business cycle. Below is a graph of the Labor Force Participation Rate ie CIVLF / CIVPOP. You can see that it fell 1% between 1999 and 2007 and an additional 2% since 2007.
But even that graph does not tell us the full story because as was explained above the denominator CIVPOP excludes a significant number of persons to start with. So where to go for a holistic picture of the labor market? Many economists suggest that the Employment to Population Ratio ie E / POP is a cleanest picture of the labor market. And the Employment / Population Ratio is telling us a very different story than the Civilian Unemployment Rate.
* One of the interesting points to note in this graph is the Employment / Population ratio started falling in 1999 and then experienced a major drop with the onset of the Great Recession in 2007. Here labor economist Robert Moffitt tries to explain the decline in the Employment / Population which occurred between 1999 and 2007. From the summary of his paper.
"The decline in the employment-population ratios for men and women during 1999–2007, before the Great Recession, represents a historic turnaround. The decline was disproportionately concentrated in the less
educated and younger groups within both the male and the female populations and, within the latter, among unmarried women, especially those without children. A standard model that emphasizes the role of wage rates and nonlabor income can explain about half the decline for men but none of it for women, whose wages rose, on average and across all subgroups, over the period. However, separate examination of trends in wages and employment for married and unmarried women, and for unmarried women with and without children, finds a more important role for wages. The decline in female employment was by far the largest for unmarried women without children, and wages for that group declined over 1999–2007. However, the
different trends in wage rates and other determinants of employment for these different demographic subgroups raise many questions that need to be explored.
educated and younger groups within both the male and the female populations and, within the latter, among unmarried women, especially those without children. A standard model that emphasizes the role of wage rates and nonlabor income can explain about half the decline for men but none of it for women, whose wages rose, on average and across all subgroups, over the period. However, separate examination of trends in wages and employment for married and unmarried women, and for unmarried women with and without children, finds a more important role for wages. The decline in female employment was by far the largest for unmarried women without children, and wages for that group declined over 1999–2007. However, the
different trends in wage rates and other determinants of employment for these different demographic subgroups raise many questions that need to be explored.
Most other possible influences on the employment-population ratio also appear unlikely to have contributed to the 1999–2007 decline. Federal income tax rates fell rather than rose, other federal tax rates did not rise, and federal transfer programs did not change in structure or in patterns of growth that line up with the employment declines, although further study of the Supplemental Nutrition Assistance Program and
the Social Security disability insurance program would be worthwhile. Changes in health status, the minimum wage, and other factors also appear to have played no role, although rising rates of incarceration among disadvantaged and younger men may have contributed. Whether changes in time use and home production accompanied the employment declines is not answerable with the available data but remains a possibility. Further analysis of possible contributors to the employment decline is clearly needed. Most other possible influences on the employment-population ratio also appear unlikely to have contributed to the 1999–2007 decline. Federal income tax rates fell rather than rose, other federal tax rates did not rise, and federal transfer programs did not change in structure or in patterns of growth that line up with the employment declines, although further study of the Supplemental Nutrition Assistance Program and the Social Security disability insurance program would be worthwhile. Changes in health status, the minimum wage, and other factors also appear to have played no role, although rising rates of incarceration among disadvantaged and younger men may have contributed. Whether changes in time use and home production accompanied the employment declines is not answerable with the available data but remains a possibility. Further analysis of possible contributors to the employment decline is clearly needed.
In 2008, with the onset of the Great Recession, the employment-population ratio plummeted, falling to approximately 72 percent for men and 63 percent for women in 2009. It has exhibited a slow recovery since that time. Given the downward trend in the ratio before the Great Recession, a natural question is whether it will return to its 2007 level after the recovery is complete, or only to a lower level. The model estimated in this paper can be used to forecast employment-population ratios in 2011, the latest year for which CPS data are available. The results suggest that the ratios may fully return to their 2007 levels."
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