The Employment Situation: A Glass Half Empty

by: Jeff Klearman

Summary

Historically low growth in the civilian labor force combined with a near 40-year low in the labor force participation rate has distorted the employment situation.

The fall in the unemployment rate to 4.9% in January 2016 was greatly assisted by the historically low increase in the number of people in the civilian labor force.

Jobs created over the last 7 years are greatly offset by a historically large decline in the labor force participation rate, again artificially lowering the unemployment rate.

I listened to President Obama address the nation after the January employment report was released. In the first few minutes of his talk Obama praised the report, highlighting the fact that businesses had created 151,000 (he actually said 158,000) new jobs and the unemployment rate had fallen to 4.9% from 10% in 2009. Obama lauded these numbers saying over the last 6 years 14 million new jobs had been created and that there had been 71 consecutive months of job creation, a new record. He went on to say that in 2014 and 2015 more jobs were created than since the 1990s.

The picture President Obama paints is rosy, but it is a picture, unfortunately, painted with the brush of half-truths and, to some extent, data picking. The job creation numbers President Obama makes reference to are from the Bureau of Labor Statistics' (BLS) Current Employment Statistics survey (CES). The BLS also publishes the Current Population Survey (CPS). The CES survey was "designed to measure employment, hours, and earnings with significant industrial and geographic detail" while the CPS survey was "designed to measure employment and unemployment with significant demographic detail". There are pros and cons for each survey, but only the CPS survey provides information regarding the number of employed persons and unemployed persons, size of the civilian labor force as well as the size of the civilian non-institutional population (ie, the population eligible to be in the civilian labor force). Only the CPS survey data allow for the calculation of the unemployment rate, the labor force participation rate and for other important and relevant comparisons between data groups. As such, the discussion below will focus on CPS survey data.

Claim: 14 million jobs created

Let's start with President Obama's claim that over the last 6 years, 14 million new jobs were created. This actual number is 13,486,000 and comes from the BLS's CES seasonally adjusted total nonfarm employee survey data. The BLS's CPS seasonally adjusted employed survey data, however, show that the number of jobs created from January 2010 to January 2016 was 12.1 million. Second of all, and even more important, is the fact that President Obama took office in January 2009, not January 2010. Jobs created since the end of January 2009 (according to CPS seasonally adjusted employed survey data) total only 8,392,000. In addition, the unemployment rate when Obama took office was 7.8% not 10.0% (that occurred in October 2009). January 2009 to January 2016 is the relevant time period upon which President Obama should be judged, not an arbitrary time period starting January 2010.

The job creation numbers by themselves cannot possible convey the whole message. Perspective is required and that can only be obtained by comparing the number of jobs created to the growth in both civilian labor force and the civilian non-institutional population. These comparisons can only be made using CPS survey data.

Claim: Job Growth is Unprecedented, Lowest Unemployment Rate in 8 years

In January 2009, the civilian non-institutional population, according to the BLS, was 234,739,000. The seasonally adjusted civilian labor force in January 2009 was 154,210,000. In January 2016, the civilian non-institutional population was 252,397,000 while the seasonally adjusted civilian labor force totaled 158,335,000. That means from January 2009 to January 2016 the civilian non-institutional population increased by 17.7 million people while the seasonally adjusted civilian labor force only increased by 4.1 million people. Over this same period (as stated above), 8,392,000 jobs were created.

If you're like me, this is where you squint, cock your head to the side and ask yourself what in the world is going on.

First and foremost is the fact that during President Obama's 7 years in office the civilian labor force increased by less than half the amount of jobs created over the same time period (ie, the ratio of the increase in the civilian labor force to the number of jobs created over this time period is slightly less than 0.50). Let me be clear, under "normal circumstances" having more jobs created than the number of people in the civilian labor force increased is a good thing: it guaranties the unemployment rate falls. But under "normal circumstances" the difference is not nearly so large. In fact, since 1955 (BLS CPS data begins January 1948) and before President Obama became president the ratio has never been below 0.65 (that occurred in the period from May 1949 to May 1956) and has averaged 1.10 over any 7 year period. In addition, not since the 7 year period from August 1950 to August 1957 has the civilian labor force increased by such a small amount under any other president and that was when the civilian labor force was about 40% of its current size.

What does all this mean? It means the decline in the unemployment rate from 7.8% in January 2009 to 4.9% in January 2016 was greatly assisted by the very low increase in the civilian labor force relative to the number of jobs created. (Interestingly, even if you look at the period from October 2009 to January 2016 where the unemployment rate fell from 10% to 4.9%, the same type numbers occurred with the civilian labor force again increasing by less than half the jobs created over that period.) In particular, if the civilian labor force had increased by 75% of the number of jobs created, the unemployment rate in January 2016 only would have fallen to 6.2%, not 4.9%.

Second and as important is the fact that from January 2009 to January 2016 the civilian non-institutional population increased by 17.7 million people while the labor force increased by only 4.1 million people (an absolutely striking occurrence). This, of course, directly translates into a much, much lower labor force participation rate. In fact, from January 2009 to January 2016, the labor force participation rate fell from 65.7% to 62.7%, a nearly 40 year historical low. What's more remarkable is that since January 1955 a 3 percentage point decline in the labor force participation rate over a seven year period has never occurred except under President Obama. Prior to President Obama, the greatest decline in the labor force participation rate was 1.4 percentage points from April 2000 to April 2007.

What does this mean? It means basically the same thing as above, but worse. As with above, it means the decline in the unemployment rate from 7.8% in January 2009 to 4.9% in January 2016 was greatly, greatly assisted by the very, very low increase in the civilian labor force relative to the increase in the civilian non-institutional population. In particular, if the labor force participation rate had remained at 65.7%, then the civilian labor force would have increased by 11.6 million people, not 4.1 million, and the unemployment rate in January 2016 would have increased to 9.6%, not fallen to 4.9%.

Claim: Job Growth from January 2014 to January 2016 is the largest since the 1990s

Honestly, this claim, even if correct, is just arbitrary. Ok, it's based on the 2 most recent years' performance, but does it really mean anything?

Anyway, let's look at 2-year job creation numbers going back to the 1990s using seasonally adjusted CPS survey data. First, from January 2014 to January 2016, 5,452,000 jobs were created (I've got to point out that over this same time period the civilian labor force increased by 3,050,000, giving a ratio of only 55.9%). Based on seasonally adjusted CPS survey data and not seasonally adjusted CES survey data, the most recent occurrence of this type growth was over 2-year period from March 2005 to March 2007, when 5,666,000 jobs were created.

And that's all I have to say about that.

To Sum It All Up

As I said in the beginning, the picture President Obama paints regarding job growth and the employment situation is rosy, but it is a picture, unfortunately, painted with the brush of half-truths and data picking.

The historically very low growth in the civilian labor force combined with a decline of 3 percentage points in the labor force participation rate to an almost 40 year low (both over the last 7 years) has distorted the employment situation in the US.

The fall in the unemployment rate to 4.9% in January 2016 was greatly assisted by the historically low increase in the number of people in the civilian labor force.

Similarly, the number of jobs created over the last 7 years is greatly offset by a historically large decline in the labor force participation rate. If the labor force participation rate had not declined, the unemployment rate in January 2016 would be much higher at 9.6%

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