Is Unemployment Really Still At 9.8%?

by: Market Analyst

Last week, I wrote an article comparing the official unemployment rate with the employment-population ratio. I pointed out that unemployment, which is the proportion of the labor force without a job and has improved from 10% to 7.7% over the past three years, is significantly overstating the measure of employment recovery and that improvement has been mostly driven by people dropping out of the labor force. The employment ratio is the proportion of the population that is working, so it is unaffected by the declining labor force participation rate (from 66.4% in Jan'07 to 63.5% now).

From last week's article:

The chart below looks at Unemployment vs an inverted Employment Rate. As we can see, the two generally move very closely together, but since late 2009, there has been a large divergence. Unemployment has declined substantially, while Employment has hardly improved at all. It fell from a high of over 63% of the population working in '06-'07 to 58.5% working in October 2010 (when unemployment peaked). Since that time, while Unemployment has improved steadily (albeit slowly), the Employment Ratio has remained between 58.2 and 58.7%. At present, 58.6% of the population is employed, just 0.1% better than when Unemployment hit its worst levels a few months after the recession ended.

Some readers asked if we could provide a measure of what the unemployment rate would be if the participation rate remained constant and people were not dropping out of the labor force. The two charts below examine those scenarios. The first chart looks at the official unemployment rate vs the unemployment rate with participation frozen at 65.0% after October 2009, when the former bottomed. While official unemployment has improved to 7.7% since then, without unemployed people leaving the labor force, true unemployment would have flat-lined for three years and would still be 9.8%.

The next chart also adds what unemployment would look like if participation were frozen at the high of 66.4% from '06-07 and the high of 67.4% from 2000. With participation held at the '07 levels, unemployment for February '13 would actually have worsened to 11.7%, and if participation had remained constant since the 2000 high, unemployment would now be an astronomical 12.9%. As a reminder, the participation rate rose for 40 years from the early-1960s and had remained above 65.5% since the late-80s. It is only in the last several years that we've seen these steep declines. These charts above give us a look into just how much that participation decline has caused unemployment to be understated.

Source for Data: Bureau of Labor Statistics

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.