The U.S. Bureau of Labor Statistics reported that the unemployment rate increased slightly from 7.5% to 7.6% in May. Each month, comments on this number include a discussion on “labor force participation"—the number that is released is based on people who are “in the labor force.” To be included in the labor force, someone has to either be employed, or actively looking for work. People who are retired, full-time students, homemakers or caregivers and do not work for wages are considered “not in the labor force.” But, people who have given up active labor market search are also considered “not in the labor force.” So, for that reason, some people who may be unemployed this month can drop out of the numbers altogether because the next month they may have given up any hope of finding a job and move into the “not in the labor force” category. Since the unemployment rate is a fraction, when someone moves from unemployed to “not in the labor force,” it means the numerator of the unemployment rate falls by one, but the denominator, which counts everyone in the labor force, also goes down by one. The net result is that the fraction gets smaller, even though no one found a job in this example.
Trying to solve the unemployment problem, then, is like thinking about a line of cars at the drive-in window of a fast-food place. Clearing the line means you need to serve people quickly—get them their food; that is the good result. The line also can get shorter because people tire of waiting in line and they simply drive off—they don’t get fed; that is a bad result. If we watch the line, then we notice this dynamic. So, a big problem is that once the line gets long, it is simply hard to clear it out.
Similarly, when we look at unemployment each month, there will be people who were unemployed the previous month; there will be some people who are going to find a job and happily leave unemployment; but, there will be some people who drop out, going to the status of “not in the labor force.”
In January 2008, employment reached a peak. Then, jobs started disappearing each month for 24 straight months—two years. This meant a massive buildup of unemployed people. Beginning in October 2010, a string of 39 straight months has seen job gains. But, over five years after the onset of the downturn, we are still 2.4 million payroll slots short of where things stood in January 2008.
Unfortunately, while jobs have been added since October 2010, we have not been adding them fast enough to really clear the unemployment problem. The unemployment rate has fallen dramatically from 9.5% to the 7.6% announced last week. But, if you were unemployed in April, the chance that you were still unemployed in May was 60%; and the chance that you simply gave up and dropped out of the labor force was 20.7%. The better outcome that people went from unemployed to employed stood at 19.3%. That is, you were more likely to give up than land a job. The chance that you would remain stuck in the unemployment line has fallen from 63.6% back in October 2010, but that is because beginning back in April 2010—28 months into the job drought—people were more likely to leave unemployment by dropping out of the labor force than by finding a job. Each and every month, the past three years running, the path out of unemployment has been a path to nowhere.
So, to get unemployment to really fall, it takes addressing the persistence of unemployment—the very high chance that the unemployed appear stuck in a line that is moving nowhere. And, why is it so urgent to get that number down now; because employment growth and employment loss have gone in cycles in economic history. Since 1939, the longest consecutive string of months with job growth we have experienced is 48 months—from July 1986 to June 1990; the second longest was 45 months—from July 1975 to March 1979. This is the third longest string of months with job gains.
Obviously, if we start losing jobs, the problem becomes more complicated. Then, we won’t be simply trying to clear the existing line, we will have to contend with the rapid addition of new people to the line—those thrown out of work. So, while it is good we have been adding jobs, and for almost a record period, we are not doing enough. We cannot get unemployment down until we start hiring faster. We are still too likely to leave people out in line. You know the blues line, “feeling like a rock before the rain.”