Sunday, 12 February 2012

The U.S. Unemployment Rate: "Lies, Damned Lies, and Statistics"


The quote from Mark Twain, "Lies, damned lies, and statistics," sums the theme of this blog. Politicians are haunted by one fundamental law of economics; a downturn in an economy leads to an ouster of its political leaders. Hence, our governmental leaders will do anything that is immoral, illegal, or unethical to garner votes for another term in office. Furthermore, the politicians may encourage government agencies to skew, distort, or exaggerate its statistics to appease, mollify, or mislead its citizens, especially the ones who vote. Consequently, this blog examines the U.S. unemployment rate in order to gain insight about the true impact of the 2007 Great Recession.

The first observation of U.S. government statistics is the sheer volume of information, data, and reports a bureaucracy can offer. Each department of the U.S. federal government has a branch that collects, analyzes, and publishes statistics. Then this branch literally publishes hundreds of different statistics with thousands of technical reports. Most people who visit these websites are easily overwhelmed by the information. The Bureau of Labor Statistics is the branch that collects and publishes statistics for the U.S. Department of Labor.

The second observation is the definition of unemployment. The U.S. government defines unemployment (called U3) as a person who is currently not working and actively seeking employment. If a person works one hour per week, he/she is not technically unemployed, although an hour a week cannot support a level of living. If a person wants to work, but the job market is extremely bad, he/she gives up, then that discouraged worker is no longer considered out of work. Consequently, the unemployment rate can decrease if a large number of jobless give up the pursuit for a job. The Bureau of Labor Statistics publishes the labor underutilization statistic (called U6) that includes discouraged workers and part-timers who want to work full time. The (seasonally adjusted) U6 was 15.1% for January 2012.

The third observation is a bureaucracy continuously revises its statistics. Hence the reported numbers are always in flux. For example, the Bureau of Labor Statistics uses telephone surveys to gather unemployment data and examines reports from the states' unemployment offices. Then the statisticians compute the statistic for that month, quarter, or year. Here is the kicker. After a statistic is released to the public, a bureaucracy may boost or reduce this number a few times over the next several months. Why are the numbers constantly revised? Did the statisticians not count all the surveys? Were the states late in reporting their statistics? Hence, government statistics have a degree of arbitrariness as the numbers are continuously revised.

The fourth observation is the statisticians seasonally adjust the numbers for monthly and quarterly data. For instance, the Bureau of Labor Statistics reported the U.S. unemployment rate fell to 8.3% in January 2012. The news reporters blindly reported this number to the masses without any serious analysis or verification. U.S. reporters have regressed into parrots who caw in unison for the government's slogans, sound bites, and propaganda. What does 8.3% really mean? First, this statistic was seasonally adjusted. Statisticians smooth monthly and quarterly statistics; high numbers are reduced while low numbers are increased. The reason is the economic activity is different for every month. January cannot be compared to December because December has more economic activity than January. Once the statistics are seasonally adjusted, then different months or quarters can be compared. The unemployment rate that is not seasonally adjusted was 8.8% for January 2012. Although this number cannot be compared to December, it can be compared to January 2011, which was 9.8%. Similarly, the not seasonally adjusted U6 was 16.2% for January 2012, falling from 17.3% for January 2011.

The fifth observation is the slight upward trend of the unemployment rate. In Figure 1, the annual unemployment rate is plotted between 1947 and 2011. The blue line indicates the jagged oscillations of the unemployment rate. Economists define a recession when the real growth rate of the Gross Domestic Product (GDP) is negative for two consecutive quarters. All recessions since 1947 were drawn with pink boxes on the graph. When examining Figure 1, the Great Recession of 2007 and the recessions of the early 1980s were particularly severe when compared to previous recessions because the unemployment rate soared to 10%. The early 1980s had a quick succession of three recessions. Using statistics to fit the best line through the data yields the red line. Moreover, the examination of Figure 1 shows the impact of the housing bubble during the 2000s. The housing bubble temporarily lowered the unemployment rate below the trend, as the bubble created millions of jobs. Unfortunately, the red line angles upward with a slight slope, indicating over time, the unemployment rate is creeping upward. Thus, the U.S. economy went through structural changes that were not conducive to low unemployment rates. The structural changes were de-industrialization, outsourcing, rise of the service economy, rise of the IT industry, aging population, and growth in government. Consequently, all structural changes impose benefits and costs on society, and they would require a separate blog.


Figure 1:  The U.S. Unemployment Rate between 1947 and 2011

The sixth observation is the structural change in employment. All the statistics were converted to a percentage of the U.S. population to remove the impact of a growing population. In July 1, 1947, the United States had a population of approximately 144 million, which increased to 312 million by July 1, 2011. In Figure 2, the first trend is the shift to more part-time labor. Part-time labor comprised 5.3% of the population in 1968 and gradually rose to 8.8% in 2011. The second trend is the impact of a recession on full-time employment. Every U.S. recession since 1947 was drawn manually onto Figure 2 in pink boxes. A recession always caused the destruction of full-time jobs. The 2007 Great Recession was particular nasty as the percent of full-time workers decreased from a peak of 40.4% in 1999 to 36.1%. This indicates a loss of approximately 13.5 million full-time jobs in 2011. The third trend is the rise of the number of people who dropped out of the labor force. Again, the 2007 Great Recession had a severe impact on the economy. The percent of people not in the labor force was 27.6% in 2011, increasing from a trough of 24.8% in 2000. Approximately, 8.7 million people left the labor force. Many reasons account for the exit from the labor market, and they are discussed in the next paragraph.

Figure 2:  Full time, Part time, and Unemployed

The seventh observation is a little discussed statistic buried within the Bureau of Labor Statistics' website. The statistic is the labor participation rate as a percentage of the population (age 16 and older). This statistic by nature will never equal 100% because several groups of people are not in the labor force. The groups are teenagers (16 to 18 years old), discouraged workers, retired workers, prisoners, committed patients, students who do not work, and soldiers. Illegal immigrants who work may not be reflected in the participation rate because the Census Bureau counted them in the population, but the Bureau of Labor Statistics did not count them in the labor force. In Figure 3, the labor participation rate is graphed between 1947 and 2011. The U.S. recessions were drawn manually onto Figure 3 as pink boxes, and a recession always lowered the labor participation rate. The 2007 Great Recession was particularly gruesome. The labor participation rate fell to 58.4% in 2011 from a peak of 64.4% in 2000. (The Year 2000 was an exceptional year). Roughly, 14.2 million people left the labor force. (The last paragraph indicated 8.7 million workers dropped out of the labor force; government statistics when viewed from different angles usually yields different results!) The real question is where did these people go? Are they discourage workers who gave up the pursuit of a job? Did more people retire? Did more people enter college without working, or the states incarcerate more prisoners?

Figure 3:  Labor Participation Rate between 1947 and 2011
 


One important assumption was made in this blog; the assumption is the Bureau of Labor Statistics is not manipulating the numbers. Although U.S. bureaucracies are not political in nature, the top leaders of the bureaucracies are chosen by the President with confirmation of the Senate. Moreover, a bureaucracy's funding depends on the President and Congress. The President and Congressmen want to be re-elected, and they may put pressure on the bureaucracies to release positive statistics. Consequently, bureaucrats have an incentive to skew the statistics, making it appear the economy is improving especially before an election. The 2012 presidential election is around the corner, and the news is reporting optimistic unemployment statistics, indicating a possible economic recovery. However, if one reads the comments at the end of those rosy unemployment stories, the readers' opinions express disbelief in those numbers. Unfortunately, this blog cannot uncover fraudulent government statistics. Nevertheless, the U.S. government's statistics do indicate the following:

  • The 2007 Great Recession was one of the worse recessions to hit the U.S. economy since the Great Depression. 
  • Employers are using more part-time labor and fewer full-time labor.  The 2007 Great Recession was particularly harsh on workers with full-time jobs.
  • A large number of workers left the labor force.  The million-dollar question is why did these workers go?  Did millions of workers become discourage and give up their search for a job?  Are more workers retiring?  If more Americans are retiring, why are the younger workers not filling these vacancies?



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