Friday, February 3, 2012

Labor Force Participation Rate (LFPR) And U-6 Unemployment Paint a Dismal Economic Picture

As a percentage of the total population, the U.S. labor force today is considerably smaller than has been the case historically. This is known as the Labor Force Participation Rate (LFPR).

And of those who are in the labor force, the unemployment rate is extremely high at more than 15% for the U-6 rate, and quite high as well for the much more heavily publicized 8.5% rate. But whichever number we choose to use, it's a high one.

So we have fewer people as a percentage of our population working or seeking work, and within that smaller labor force there are far too many people unable to find satisfactory work.

Accordingly, the LFPR and unemployment rate together spell serious long term difficulties for the U.S. jobs market, economy and overall financial condition. Let's review the LFPR and unemployment situations separately.

Chicago Fed Blames Baby Boomers for Big Part of Labor Force Drop has this to say about the troubling drop in the LFPR, as well as which part of the downward trend is long term and structural, and which part is temporary, or recession related.

"The long-running decline in the proportion of Americans still tied to the labor force relative to the nation’s total population has been vexing economists and government officials for some time.

They worry the sharp decline in what is called the labor-force-participation rate is a sign overall economic conditions have become so unfavorable many people are simply dropping out of looking for formal work altogether. Against that uncertainty, new research from the Federal Reserve Bank of Chicago argues half of the decline in the labor-force-participation rate over roughly the last decade is a demographic story rather than an economic one. . .

“Just under half of the post-1999 decline in the U.S. labor force participation rate…can be explained by long-running demographic patterns, such as the retirement of baby boomers,” the authors wrote.

In the paper, the researchers flag that following a peak of 67.3% in early 2000, the labor-force-participation rate fell to 64.0% in December 2011. They say the decline is twice as large as any other similar retreat in the post-World War II period. The current labor-force-participation rate mirrors what was last seen in the late 1970s and early 1980s, also times of high unemployment.

Given that falling rates are driven by baby boomer retirements, future labor-force-participation rates likely will be lower than they would otherwise be. The paper said in eight years, with all things being equal, the labor-force-participation rate likely will be around 65.4%. . . .

A correct read on the participation rate helps economists make sense of monthly unemployment-rate data. For example, a falling unemployment rate generated by a drop in the labor-force-participation rate is not the good number it seems. At the same time, a rise in the unemployment rate generated by an increase in the labor participation rate may actually be a good thing, because it could signal more prospective workers see a better chance of getting hired due to improved economic conditions."

Broader Unemployment Rates, By State describes the current unemployment situation in the U.S. and highlights the U-6 rate, which includes discouraged and part time workers in addition to those officially designated as unemployed:

"In the nation’s worst-off states, more than one in five residents wanted a job and were unable to find one last year.

Click for an interactive map of broader unemployment rates.

Unemployment nationwide averaged 8.9% in 2011, but the rate still hovered in the double-digits in states such as Nevada and California. Expanding the rate to include those who wanted to work but gave up their hunt provides an even darker picture: In each of those states the broader measure of unemployment topped 20%, according to a Labor Department report.

The rate, known as the U-6, is designed to measure underutilization in the labor market and includes jobless workers, those who want a job but have given up searching and those who are working only part-time because they can’t find full-time positions.

States that have high unemployment rates unsurprisingly also have bigger U-6 rates, but looking at the differences between them can give us some insight in the way that individual states are struggling."

If the primary reason for the LFPR becoming smaller is baby boomer related, that means even more people will be receiving social security and medicare payments. As that occurs, fewer will be working and paying higher income taxes.

That combination of millions of fewer workers and millions of more retirees will tend to make our nation's financial situation an even more precarious one.

Next we come to unemployment. The huge gap between the official 8.5% rate and the 15% U-6 rate simply means that far too many people can't find acceptable employment.

In turn that translates into lower paying jobs, less income and reduced tax receipts.

Although most people think things are bad enough already, the LFPR and U-6 unemployment rates tell us that things in fact are much worse than people realize.

Let's hope more of our fellow citizens discover this troubling reality sooner rather than later.

Only then will our numerous and serious problems be addressed and solved instead of continuing to be ignored.

Thanks. Bob.

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