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Katchum
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Albert Sung is the author of Correlation Economics, monitoring breaking economic news on a day to day basis. He started investing in 2008 because of the economic crisis and holds a masters degree in chemical engineering. Previously, he worked several years as a process engineer at Ashland, a... More
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Correlation Economics
  • Labor Force Participation Rate Tells The Whole Story 1 comment
    Dec 7, 2013 2:19 PM

    A Zerohedge article made me think about the unemployment rate. Apparently, year over year, the civilian population rose while the labor force declined. You might say: "What does this mean?".

    Let's first look at this informative video from Salman Khan: http://www.youtube.com/watch?v=1KKOOHaIllY#t=428

    The yellow circle is the civilian population, people older than 16+ years, which can be found here:

    (click to enlarge)

    The green circle is the labor force, people who can work (employed + unemployed), which can be found here:

    (click to enlarge)

    This conveniently gives me the labor participation rate by dividing them: (labor force/civilian population):

    (click to enlarge)

    You can see that since 2000, the labor force participation rate has been declining and it is even declining faster after 2008. When the labor force participation rate declines, it becomes more and more difficult to support the economy as a smaller amount of people are working for an increasing population. This will lead to higher deficits, higher taxes, less savings etc... So the labor force participation rate is a great economic indicator to watch.

    If you look at the figure below, we see that the yellow circle is growing faster than the green circle. And just recently, the green circle is even declining. While the yellow circle is growing. The yellow circle can only grow if young people (younger than 16 years) come into that yellow circle.

    (click to enlarge)

    This also means that people are going out of the labor force (green circle) at a faster rate than young people are getting into the population (yellow circle). This is probably due to people who are discouraged or going on retirement.

    As the unemployment rate actually declined to 7% now, these people leaving the labor force are mostly unemployed.

    Moreover, we discover a negative correlation here.

    We all know the Unemployment Rate is rigged by the U.S. government. A much better indicator is the Labor Force Participation Rate. Historically, we see a negative correlation between the Labor Force Participation Rate and the Unemployment Rate.

    (click to enlarge)

    Whenever the LFPR goes up (blue chart), we see a decline in the unemployment rate (red chart) and vice versa. This correlation has been true until 2008, where the U.S. government falsified the unemployment numbers and added hedonic adjustments. The red line should be going upwards since 2010 if we include discouraged workers, part-time workers, disabled workers, etc...

    So, the key is to look at the labor force participation rate.

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  • I wish I had said all of that.
    18 Dec 2013, 11:07 PM Reply Like
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