Big Government and Disguised Unemployment

The “jobs report” to the contrary notwithstanding, by the measure of real unemployment the Great Recession is still with us. Nor is it likely to end anytime soon, given the anti-business and anti-growth policies that are still embedded in statutes and regulations. (Trump is making a start on rolling back those policies, but he will need a lot of help from Congress and the regulatory agencies — both centers of “resistance”. Most State and local edicts are beyond his reach.)

Officially, the unemployment rate stands at 4.1 percent, as of December 2017. Unofficially — but in reality — the unemployment rate stands 6.5 percentage points higher at 10.6 percent, where it stood 9 months earlier. While the official unemployment rate has dropped by 5.9 percentage points from its peak in 2009, the real unemployment rate has dropped by only 2.9 percentage points since then.

How can I say that the real unemployment rate is 6.5 percentage points above the real rate? Easily. Just follow this trail of definitions, provided by the official purveyor of unemployment statistics, the Bureau of Labor Statistics:

Unemployed persons (Current Population Survey)
Persons aged 16 years and older who had no employment during the reference week, were available for work, except for temporary illness, and had made specific efforts to find employment sometime during the 4-week period ending with the reference week. Persons who were waiting to be recalled to a job from which they had been laid off need not have been looking for work to be classified as unemployed.

Unemployment rate
The unemployment rate represents the number unemployed as a percent of the labor force.

Labor force (Current Population Survey)
The labor force includes all persons classified as employed or unemployed in accordance with the definitions contained in this glossary.

Labor force participation rate
The labor force as a percent of the civilian noninstitutional population.

Civilian noninstitutional population (Current Population Survey)
Included are persons 16 years of age and older residing in the 50 States and the District of Columbia who are not inmates of institutions (for example, penal and mental facilities, homes for the aged), and who are not on active duty in the Armed Forces.

In short, if you are 16 years of age and older, not confined to an institution or on active duty in the armed forces, but have not recently made specific efforts to find employment, you are not (officially) a member of the labor force. And if you are not (officially) a member of the labor force because you have given up looking for work, you are not (officially) unemployed — according to the BLS. Of course, you are really unemployed, but your unemployment is well disguised by the BLS’s contorted definition of unemployment.

What has happened is this: Since the first four months of 2000, when the labor-force participation rate peaked at 67.3 percent, it has declined to 62.7 percent:


Source: See next graph.

Why the decline, which had came to a halt during G.W. Bush’s second term but resumed in late 2008? The slowdown of 2000 (coincident with the bursting of the dot-com bubble) and the shock of 9/11 can account for the decline from 2000 to 2004, as workers chose to withdraw from the labor force when faced with dimmer employment prospects. But what about the sharper decline that began near the end of Bush’s second term?

There we see not only the demoralizing effects of the Great Recession but also the lure of incentives to refrain from work, namely, extended unemployment benefits, easier access to disability benefits, the aggressive distribution of food stamps, and “free” healthcare” for an expanded Medicaid enrollment base and 20-somethings who live in their parents’ basements.*

Need I add that both the prolongation of the Great Recession and the enticements to refrain from work were Obama’s doing? That’s all on the supply side. On the demand side, of course, there were the phony and even negative effects of “stimulus” spending, the chilling effects of regime uncertainty, which persisted beyond the official end of the Great Recession, and the expansion of government spending and regulation. It remains to be seen whether and to what extent Mr. Trump can undo the great damage done by Obama.

If the labor-force participation rate had remained at its peak of 67.3 percent, so that the disguised unemployed was no longer disguised, the official unemployment rate would have reached 13.5 percent in December 2009, as against the nominal peak of 10 percent in October 2009. Further, instead of declining to the phony rate of 4.1 percent in December 2017, the official unemployment rate would have dropped only to 10.6 percent.

The growing disparity between the real and nominal unemployment rates is evident in this graph:


Derived from Series LNS12000000, Seasonally Adjusted Employment Level; Series LNS11000000, Seasonally Adjusted Civilian Labor Force Level; and Series LNS11300000, Seasonally Adjusted Civilian labor force participation rate. All are available at BLS, Labor Force Statistics from the Current Population Survey.

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* Contrary to some speculation, the labor-force participation rate did not decline because older workers are retiring earlier. The participation rate among workers 55 and older rose steadily from 1994 to 2014. The decline is concentrated among workers under the age of 55, and especially workers in the 16-24 age bracket. (See this table at BLS.gov.) Why? My conjecture: The Great Recession caused a shakeout of marginal (low-skill) workers, many of whom simply dropped out of the labor market. And it became easier for them to drop out for the reasons adduced above.


Related reading:

Randall Holcombe, “Long-Term Unemployment Benefits Expire; Long-Term Unemployment Falls,” Mises Economics Blog, September 10, 2014

Arnold Kling, “The State of the Economy,” askblog, October 12, 2014

Stephen Moore, “Why Are So Many Employers Unable to Fill Jobs?The Daily Signal, April 6, 2015

Related posts: Start here. See especially “The Rahn Curve Revisited“.