26/7/19: Stop Equating Low Unemployment Rate to High Employment Rate

There is always a lot of excitement around the unemployment stats these days. Why, with near-historical lows, and the talk about 'full employment', there is much to be celebrated and traded on in the non-farm payrolls stats and Labor Department press releases. But the problem with all the hoopla around these numbers is that it too often mixes together things that should not be mixed together. Like, say, mangos and frogs, or apples and moths.

Take a look at the following data:

Yes, unemployment is low. Civilian unemployment rate is currently at seasonally-adjusted 3.7% (June 2019), and Unemployment rate for: 20 years and over, at 3.3%, seasonally adjusted. On 3mo average basis, last time we have seen comparable levels of Civilian unemployment was in 1969, and 20+ Unemployment rate was in 2000. Kinda cool, but also revealing: historical lows in unemployment require  Civilian unemployment metric to confirm. Which means that factoring in Government employment, things are bit less impressive today. But let us not split hairs.

Here is the problem, however: record lows in unemployment are not the same as record levels in employment. Low unemployment, in fact, does not mean high employment.

To see this, look at the solid red line, plotting Employment rate for 20 years and older population. The measure currently sits at 71.2 percent and the last three months average is at 71.1 percent.  Neither is historically impressive. In fact, both are below all months (ex-recessions) for 1990-2008. Actually, not shown in the graph, you would have to go back to 1987 to see the same levels of employment rate as today. Oops...

But why is unemployment being low does not equate to employment being high? Well, because of a range of factors, the dominant one being labor force participation. It turns out (as the chart above also shows), we are near historical (for the modern economy's period) lows in terms of people willing to work or search for jobs. Or put differently, we are at historical highs in terms of people being disillusioned with the prospect of searching for a job. Darn! The 'best unemployment stats, ever' and the worst 'willingness to look for a job, ever'.

U.S. Labor Force Participation rate is at 62.9 percent (62.8 percent for the last three months average). And it has been steadily falling from the peak in 1Q 2000 (at 67.3 percent).

When we estimate the relationship between the Employment rate and the two potential factors: the Unemployment rate and the Participation rate, historically (since 1970s) and within the modern economy period (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. Unemployment rate is weakly negatively correlated with Employment rate, or put differently, decreases in unemployment rate are associated with small increases in employment; across all periods;
2. Labor force participation rate is strongly positively correlated with Employment rate. In other words, small increases in labor force participation rate are associated with larger increases in employment; across all periods;
3. Labor force participation rate, in magnitude of its effect on Employment rate, is roughly 14-15 times larger, than the effect of Unemployment rate on Employment rate; across all periods; and
4. The relatively more important impact of Labor force participation rate on Employment, compared to the impact of Unemployment rate on Employment has actually increased (albeit not statistically significantly) in the last 9 years.

These points combined mean that one should really start paying more attention to actual jobs additions and employment rate, as well as participation rate, than to the unemployment rate; and this suggestion is more salient for today's economy than it ever was in any other period on record.

But above all, please, stop arguing that low unemployment rate means high employment. Bats are not cactuses, mangos are not moths and CNN & Fox kommentariate are not really analysts.