Economy adds 228,000 jobs in November, unemployment holds at 17-year-low rate of 4.1%, but wages are stagnant. Why?

December 9, 2017

Yesterday morning the Labor Department announced that the economy added another 228,000 jobs in November and the unemployment rate held steady at 4.1% – the lowest rate in 17 years.  Yet, wages remain stagnant.  Everyone – economists, the Federal Reserve, business analysts – everyone, seems totally baffled by this phenomenon.  Why isn’t this supposedly strong demand for labor beginning to drive up wages as employers compete for workers?

The answer is that the unemployment rate isn’t really 4.1%.  It’s 7.1%.  The Labor Department would like you to forget that the rapid drop in unemployment following the “Great Recession” in 2008 was fueled in large part by its “mysteriously vanishing labor force” trick, claiming that vast swaths of workers were simply dropping out of the labor force, so they were no longer included in the unemployment calculation.  Take a look at the following chart.  It’s a little confusing, so I’ll explain.

Labor Backlog

Look first at the blue and orange lines.  The blue line tracks the actual growth in the labor force due to growth in the overall population.  The orange line tracks the labor force growth as reported by the Labor Department.  Note that in all but three of the past ten years did the Labor Department’s reported growth in the labor force exceed the actual growth.  It usually significantly under-reports that growth.  The result is a growing “backlog” of unreported workers, represented by the yellow line on the chart.  That backlog peaked at 6.4 million workers in 2014 and fell to 5.1 million in 2016 but, so far this year, has actually begun to rise again, hitting 5.2 million workers in November.

Now, look at the green line, which is the growth in the employment level.  If that growth matches the growth in the labor force, then unemployment will hold steady.  If it exceeds that growth, then unemployment will fall.  Compared to the blue line – the real growth in the labor force – it has consistently exceeded that blue line by a small amount each year, beginning in 2011 – the start of the recovery from the “Great Recession.”  But if you compare the green line to the orange line – the fake growth in the labor force reported by the Labor Department – it has beaten that growth by a significant amount every year beginning in 2010.  The result of that growth in the employment level relative to the fake growth in the labor force is the Labor Department’s reported unemployment rate, represented by the purple line.  Note that it has fallen precipitously to its current bogus level of 4.1%.

That’s why wages are stagnant, because there is a huge, unreported backlog of labor force which eagerly snatches up any extra jobs that are created each month.  The labor force is still pretty grossly out of balance with the demand for labor.  Until that backlog of workers is employed, wages will remain stagnant.

Just to drive home the point about how phony the official unemployment rate is, take a look at these next two charts:

Per Capita Employment

Unemployed Americans

The first chart tracks the employment level relative to the total population.  It’s analogous to what the Labor Department reports as the “participation rate.”  As yo can see, it’s been very slowly recovering from the 2008 recession, but still hasn’t gotten back to its pre-recession level in 2007.  (You can see that, even then, it was already plummeting.  I can’t tell you what it was before that since I didn’t begin tracking it until then.)  In November of 2007, per capita employment was at 48.4% and the unemployment rate was 4.7%.  Last month, per capita employment was at 47.2%, but the unemployment rate was 4.1%.  How in the world could unemployment have fallen at the same time that per capita employment fell?  Sounds pretty bogus, doesn’t it?

The second chart above shows a similar phenomenon.  It tracks the number of unemployed, assuming that the labor force grew along with the population.  In November of 2007 there were 7.2 million unemployed workers.  Last month there were 11.8 million.  And yet the unemployment rate fell?  Baloney.

While some see nothing but good news in yesterday’s employment report, I see some warning signs.

  • The employment level grew by only 57,000, far less than the reported growth of 228,ooo jobs.
  • Per capita employment fell slightly for the 2nd month in a row.
  • An honest accounting of unemployment (one that’s honest about growth in the labor force) finds that unemployment rose for the 2nd month in a row to almost 7.2% after reaching a low of 6.8% in September.  That’s a notable jump.

So now you know why wages are stagnant.  The demand for labor hasn’t caught up to the backlog of unreported growth in the labor market.

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February Employment Report: “Real” or “Fake?”

March 15, 2017

The employment report for the month of February (the first full month of the Trump administration) was released on Friday and the numbers looked pretty good.  The economy added 235,000 jobs and the unemployment rate fell one tenth to 4.7%.  President Trump hailed the news and declared that, though the employment reports during the Obama administration were fake, that the February numbers were very real.

Let’s examine that claim.  First of all, take a look at this chart:  Labor Backlog.  Some explanation is in order.  “Actual labor force growth” is the growth in the labor force if it had grown at the same rate as the overall population as it does in reality.  The “BLS reported labor force growth” is the growth in the labor force that the Bureau of Labor Statistics uses to calculate the unemployment rate.  The “change in employment level” is a figure taken directly from the BLS monthly data.  It’s the growth in the number of people who report being employed in the household survey.  The “labor force backlog” is the difference between the growth in employment level and the “actual labor force growth.”  If the employment level grows faster, then unemployment should decline along with the “labor force backlog.”

Note that during the Obama years, the BLS consistently reported less growth in the labor force than what the growth in the population would suggest.  Only in 2012 and 2015 did the BLS report labor force growth that was slightly above actual growth.  The result is that the “labor force backlog” grew steadily during the Obama administration until it peaked at the end of 2014 at 6,359,000 workers who were unemployed.  By the end of 2016, that backlog had fallen only slightly to 5,994,000 workers.  In spite of that, according to the BLS, the unemployment rate plummeted from 9.9% in 2008 to 4.7% in 2016.  That’s impossible and the only way that the BLS was able to make it appear that the unemployment rate was dropping was by claiming that workers were dropping out of the labor force or by not growing the labor force as the population grew, or through some combination of those factors.  Thus, when Trump claimed that the employment data was “fake” during the Obama administration, he was exactly right.  If you’ve been a follower of this blog, you know that it’s something that I maintained all along throughout the Obama administration.

OK, so how about Trump’s claim that the numbers now are “real?”  So far, in January and February, the BLS has reported growth in the labor force of 416,000 workers.  The actual growth in the labor force – if it grows in proportion to the population – is only 89,000 workers.  In other words, so far in 2017, the BLS now claims that 327,000 “missing” workers have reappeared in the work force.  That supports Trump’s claim that his numbers are real.  But time will tell.  Two months’ of data isn’t nearly enough to judge how honest the Trump administration is being when it comes to the employment reports.  It’s something I’ll watch just as closely as the Obama numbers.


Trouble Signs in the Employment / Labor Market Picture

October 8, 2016

The September employment report, released Friday by the Bureau of Labor Statistics, continues a trend that has characterized much of 2016.  Job growth is slowing.  The economy added 156,000 jobs, but that’s the third straight monthly decline and is below the year-to-date average for 2016 (178,000 jobs per month), which is already down from 2015 (229,000 jobs per month).

Economists were at odds over how to interpret this latest report.  Some called it a “goldilocks” report – not too hot and not too cold.  In fact, on the surface, that might seem an apt analysis.  156,000 new jobs should be enough to absorb the growth in the labor force that results from population growth.  Yet, unemployment rose to 5.0% after hitting a low of 4.7% in May.

What’s happening is that what I have referred to in the past as the “mysteriously vanishing labor force” is reappearing.  It’s not a one-month phenomenon, but a trend that’s been building for well over a year now.  To better illustrate what’s happening, I ran some numbers dating back to the onset of the financial crisis that began at the end of 2007.  I tracked the change in the labor force and compared it to what the real growth in the labor force has been, assuming that people still need to find work to support themselves in about the same proportion that we’ve seen historically.  That is, about half of the population.  In other words, if the U.S. population grows by three million per year, it’s safe to assume that about 1.5 million of those people need work to support themselves and their dependents.  That’s been the historical norm.

If the growth in the labor force recorded by the BLS didn’t keep pace with the actual population, or if it actually contracted, then that’s a labor force “backlog” that the economy will eventually have to absorb and put to work at some point.

I then compared this backlog to the “employment level” reported by the BLS from its “household survey” portion of the monthly employment report.  Here’s what I found:

labor-backlog

From 2008 until present, the actual labor force grew pretty consistently each year, along with the growth in the population.  (2011 was lower because of an adjustment to the U.S. population based on the 2010 census.)  However, note the 2nd line – the growth (or contraction) of the labor force reported by the BLS.  Until last year, only one time did the BLS-reported growth exceed the actual growth in the labor force – in 2012.  Each year that it was less, people actually dropped out of the labor force – thus, the “mysteriously vanishing labor force.”  My more cynical side suspects the Obama administration of manipulating this figure to make the unemployment rate lower.  But let’s assume that people actually did drop out, employing an array of tactics to survive financially, at least for some period of time.

The third line is a calculation of the “labor force backlog,” a cumulative tally of how many people have left the labor force.  For example, in 2009 when the BLS reported that the labor force actually contracted by 1.544 million workers, this figure added to the actual growth in the labor force of 1.324 million workers, produced a backlog of 2.868 million workers.  Added to the 2008 figure, the backlog by the end of 2009 was 3.505 million workers.

Line 4 is the change in the employment level reported by the BLS based on the household survey.  Again using 2009 as an example, the BLS reported that the employment level actually fell in 2009 by 5.356 million people.  It was a horrible year.  As a result, the unemployment rate actually soared to 9.9% in 2009 from 7.3% in 2008.  (It was 5.0% in 2007.)

With all that said, here’s the problem I see developing.  In 2015, the growth in the labor force reported by the BLS exceeded the actual labor force growth.  In other words, people in the “labor backlog” rejoined the work force.  And through last month, that has accelerated dramatically.  In only nine months, the labor force has grown by an amount that would usually take almost two years.

Economists say that this trend is the result of an improved labor market.  People see the jobs picture brightening, making the time right to find a good job.  But I believe another factor is at play here.  The tactics used by displaced workers to survive the downturn have run their course.  Those who went back to school for more training and more advanced degrees (including those who scammed the system and used student loans to meet living expenses) are now saddled with all the student debt they can endure.  Those who went back home to live with Mom and Dad may have overstayed their welcome or have put their families in a financial bind.  Others may have exhausted the severance packages they received when they lost their jobs.  People need a source of income to survive.  The idea that people could simply drop out of the labor force without consequences was preposterous.

The labor force backlog reached a record 6.359 million people by the end of 2014.  As of last month, it’s dropped some to 4.9 million workers, but that’s still a huge backlog.  As of last month, workers are pouring back into the labor force at a rate that has exceeded the growth in the employment level, a trend that’s actually accelerating at the very same time that job creation seems to be slowing.  As a result, unemployment has begun to rise again. This trend is likely to begin to put downward pressure on wages and could actually reduce consumer confidence and slow the economy.  And, it should be noted, that much of the job creation we’ve seen in recent months has been in the restaurant and bar industry and in retail – sectors of the economy that are especially sensitive to consumer confidence.  They’re the first places people rein in spending when finances get tight.

All of this spells trouble for the economy in the coming months.