Tuesday, March 09, 2004

Unpacking the Unemployment Rate 

George Bush has claimed that his tax cuts are responsible for the reduction in the unemployment rate from 6.1% to 5.6% over the last 6 months. Some recent threads on Brad DeLong's web site discuss the role that small business owners, discouraged workers, and the choice of employment data sets may play in the reduction. I agree with DeLong's conclusion, that the best explanation for the reduction in the unemployment rate is that laid off workers have gotten discouraged and stopped looking for work. I'm going to put some statistics on the table to flesh out this argument. The data I use are taken from the Labor Department's Bureau of Labor Statistics.

Call the number of people with jobs "E" and the number of people actively looking for jobs "L". The unemployment rate is defined as "L/(E+L)". Unemployment doesn't take into account people who are not looking for work, because it would be misleading to include homemakers and full-time students in the ratio. Notice that the unemployment rate will decrease whenever L gets smaller. L gets smaller when people looking for work find work (so L's turn into E's) or when people stop looking for work (L just goes down with no change in E).

Is the employment rate falling because people are finding jobs, or because they have become discouraged, and stopped looking for work? We can answer this question by looking at another statistic, the employment-population ratio. This is just the proportion of Americans age 16 or older that have jobs. If unemployment is decreasing because people are finding jobs, the fall in the unemployment rate will be accompanied by an increase in the employment-population ratio. If the unemployment decrease is driven by discouraged workers, the emp-pop ratio will stay the same, or even decrease.

Here is a table of the unemployment rates and employment-population ratios for every month from January 2003 to February 2004. Unemployment is listed first, with the emp-pop in parentheses.

2003: 5.8(62.5), 5.9(62.4), 5.8(62.3), 6.0(62.4), 6.1(62.3), 6.3(62.3), 6.2(62.2), 6.1(62.2), 6.1(62.1), 6.0(62.2), 5.9(62.3), 5.7(62.2).

2004: 5.6(62.4), 5.6(62.2).

Overall, the emp-pop ratio has hardly fluctuated from its average of 62.27. I am content to say that the changes in this ratio are within the realm of sampling error, but if you did try to identify a trend it would clearly be downwards. Even if we give Bush the most generous interpretation possible, the fact is that the reduction in the unemployment rate has DEFINITELY NOT been matched by an increase in actual jobs. Conclusion: The fall in unemployment is due to the fact that unemployed people are discouraged and have just stopped looking for work.
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