Seven years after the start of the Great Recession, the labor market recovery is in its adolescent phase. It’s had a growth spurt, and is showing signs of new-found strength. But like a cocky teenager, its bold exterior belies a bundle of insecurities and contradictions. The course of maturation is as yet unclear. The adolescent labor market could give way to a healthy, prosperous adult. Or it could hang out in pointless rebellion for years, harming everyone in its path.
Unfortunately, we’ve tended to rely on just a single economic indicator—the unemployment rate—to assess the maturity of the labor market.
By obsessing over a single statistic, the national conversation about the labor market glosses over fundamental weaknesses that continue to undermine our well-being and endanger our future growth.
It is time things changed.
This first entry in The Century Foundation’s A Working Paper Series offers a more textured look at the labor market picture. Specifically, we’ll examine four underappreciated weakness in today’s labor market:
- The ratio of workers to nonworkers is nearing an all-time low. Part of the drop in headline unemployment numbers is explained by the fact that many have just given up on looking for work entirely.
- The share of long-term unemployed is up. People who are out of work for more than twenty-six weeks can sometimes end up permanently unemployable.
- Many who are working are underemployed. The unemployment rate is silent on those who have part-time jobs but would prefer full-time jobs.
- Wages remain stagnant. Even those who do have jobs are facing flat or even declining wages.
Beyond the headlines, some groups have emerged from the recession quite well, while many others are being left further and further behind. In other words, the labor market is sending mixed signals—not unlike a blossoming teen.
Most discussions about the labor market recovery begin with the unemployment rate.
This focus on joblessness is understandable. Work is about more than a paycheck. In modern society, jobs are how we satisfy the basic human instinct to provide for our own well-being and that of our kin.
But it’s not just about material comforts.
Performing meaningful work—expending conscious effort in the pursuit of an objective—can bring deep personal satisfaction that is difficult to replicate in other settings. The true payoff of work can be as much psychological and emotional as it is material. Work helps us realize who we are, what we are made of, and where we want to go.
Work can bring prosperity, yes, but equally important, it allows us to prosper.
So prioritizing the unemployment rate over other labor market indicators is a sensible ordering for policy. Before we worry about wages, productivity, and all the other things that keep labor economists up at night, let’s do our best to make sure everyone who wants a job can find one.
By this measure, the Great Recession was devastating.
During the two-year period ending in December 2007—the official start date of the recession—the unemployment rate averaged 4.6 percent. By the recession’s official end, in June 2009, it had more than doubled, to 9.5 percent, before topping out at 10.0 percent in October 2009.
It was only the second time since World War II that unemployment hit double digits. And then, for a while, it refused to budge, stubbornly remaining above 9 percent for thirty consecutive months, through September 2011.
High unemployment necessarily means job losses. So it is hardly coincidental that the second most closely tracked indicator of labor demand is job growth—that is, are employers firing or hiring?
In January 2008, 138.4 million Americans held (nonfarm) jobs.
Beginning in February 2008, employers cut jobs for twenty-three consecutive months. By December 2009, when all was said and done, some 8.7 million jobs had been eliminated.
Things scarcely improved during the next several months, and as late as September 2010, the nonfarm employment losses remained above 8 million.
Since the fall of 2010, however, things have been looking up (or, rather, down).
Unemployment fell 1.2 percentage points, to 7.8 percent by September 2012, and another 1.2 points, to 6.6 percent by January 2014. The steady descent has continued through September 2014. The current unemployment rate (5.9 percent) is scarcely above the Congressional Budget Office’s estimate of the “natural” rate of unemployment of 5.8 percent.
Dating back to October 2010, employers have added jobs for forty-eight consecutive months, at a clip of 190,000 monthly, on average. Job growth has been even stronger lately, with the economy adding an average of 227,000 a month in 2014 through September.
And May 2014 marked a milestone: for the first time, total nonfarm payroll employment surpassed pre-recession levels.
By these measures, the labor market appears to have reached escape velocity from the gravitational clutches of a seven-year-old financial crisis.
Behind the recent rosy unemployment numbers lurks an array of less sanguine statistics.
The reason, in short, is that the definition of labor underutilization embodied in the unemployment rate is quite specific—and in some ways misleading.
To be counted as unemployed, you must be actively looking for work.
Which means that the unemployment rate doesn’t capture those who want to work, but believe either that no jobs are available, or that there are none for which they would qualify. Economists refer to these people, quite descriptively, as “discouraged workers.” They a part of a broader class of “marginally attached” workers—those who want to work but have stopped the job search.
So when we see the unemployment rate declining, it might be that more job seekers are finding work. But it could also be that they’re giving up.
Without context, we can’t tell.
To provide that context, we use a measure known as the labor force participation rate (LFPR). It’s just what it sounds like: the share of the population either working or seeking work.
Notice what the labor force participation rate doesn’t do. Unlike the unemployment rate, it doesn’t exclude those hit hardest by weak labor markets: the people who have given up hope of working.
That’s an important corrective.
To make an analogy to sports, you wouldn’t measure golf’s popularity simply by tabulating country club membership—you’d also consider those who could only afford public courses and those who would like to play but think they’re no good. Same with the LFPR. You’re on the roster even if you’re outside the ranks of active participants. Think of it as an inclusive optimist: it doesn’t count anyone out.
Like the unemployment rate, the labor force participation rate deteriorated during the Great Recession, falling from 66.0 percent in 2007 to 64.4 percent in October 2010. But as the unemployment rate has improved since then, the labor force participation rate has actually gotten worse.
By October 2013, the labor force participation rate hit 62.8 percent. And it has essentially stayed there since then, even as the pace of hiring has picked up.
So what’s going on?
Labor force participation is driven by both structural and cyclical factors. Structural factors are demographic things like workers’ ages and levels of education that influence their decisions to participate in the labor market. Cyclical factors are the normal ups and downs of things like hirings and firings in the business world.
In the past half century, structural factors have more often than not been the dominant driver of the labor force participation rate.
The first of those factors is the unprecedented entry of women into the workforce. Though it had risen gradually since World War II, women’s labor force participation did not surpass 40 percent until 1966. But in the decade or so that followed, it took off, jumping by a quarter, to 50 percent by 1978. The ascent continued for the next twenty years, reaching 60 percent in 1998.
At the same time, men’s labor force participation began a long secular decline. Above 85 percent in the early-1950s, the LFPR among men dropped below 80 percent in 1969, never to return. It continued to fall to 75 percent in 1994, and remained there until the turn of the century.
These gender-based trends trace their origins to a constellation of demographic, social, and economic forces. Together, they form a compelling narrative.
Changing cultural norms in the 1960s and 1970s made it more acceptable for women to work outside the home. Growing global competition, technological change, stagnating wages, and rising income inequality made it more necessary for households to have a second income. And of course, through it all, the entrance of the Baby Boom generation—those born between 1946 and 1964—into their prime working years meant the share of the population able and eager to work was at an all-time high.
So it’s hardly surprising that these forces—more prime-aged workers, more working women, and tighter household budgets—produced record labor force participation levels. From late 1996 through early 2001, the overall rate held a steady average of 67.1 percent, its highest ever.
But this five-year plateau also turned out to be the peak, and beginning in 2002, labor force participation began to edge downward. As recently as 2008, participation remained at 66.0 percent. This gradual decline has been long expected. The oldest Baby Boomers, after all, were beginning to hit their retirement years, so it is reasonable that as the population aged, the LFPR would gently shrink.
But that’s not what happened.
Suddenly, in the midst of the Great Recession, labor force participation plummeted, dropping a full percentage point, from 65.9 percent to 64.9 percent, between the fourth quarter of 2008 and the fourth quarter of 2009. By 2012, it fell below 64 percent and continued to decline throughout 2013. For the twelve months beginning in October 2013, labor force participation averaged 62.9 percent—a level not seen since 1977.
So, the LFPR tells a recovery narrative that somewhat diverges from the rosier picture painted by following the unemployment rate. But it still leaves us with a puzzle: why? Is labor force participation dropping mostly because of demographics, or has the recession caused some type of permanent damage? This is a puzzle to which we will return below. For now, suffice it to say labor force participation is down—and this decline reminds us that considering the unemployment rate in isolation is uninformative.
Which leads to an obvious—but not often enough asked—question: why don’t we consider unemployment and labor force participation rate together, in a sort of “participation-adjusted” unemployment rate?
Fortunately, such an indicator already exists, even if we don’t pay enough attention to it. It’s called the employment-population ratio (or E-P ratio). And it’s the best way to measure labor market health.
The employment-population (E-P) ratio counts up the number of people in in the civilian, noninstitutional population, age 16 years and older, who are employed and divides it by the total number of people in the 16+ civilian, noninstitutional population. (Persons under 16 years of age, as well as those in institutions such as nursing homes or prisons, or on active duty in the armed forces are excluded from the labor force statistics.).
Thus, the E-P ratio captures the effects of both unemployment and labor force participation, making it a more complete gauge of the labor market than either alone. It recognizes discouraged workers, and it also defines success as having a job rather than simply looking for one.
In 2007, before the onset of the recession, the E-P ratio was 63.0 percent. This was exactly in line with its average since 1994, when it ranged between 62.5 percent (in 1994) and 64.4 percent (in 2000). But like the labor force participation rate, it plummeted during the recession, falling to 61.0 percent in December 2008, and, more dramatically still, to 58.3 percent in December 2009.
So what happened to the E-P ratio as the economy improved?
Not much at all.
The E-P ratio remained at or below 59 percent for sixty-one consecutive months between September 2009 and September 2014, hitting a low of 58.2 percent three times.
For context, the last time it was below 59 percent was in 1982–83.
All else equal, it is preferable to have more people working than fewer. Economists think of the situation in terms of a concept known as the dependency ratio—the number of non-workers for every worker. In general, we want this number to be low. Many hands make for a lighter load.
Of course, some of the trends hitting labor force participation also affect the E-P ratio. Labor force participation drops off quickly as workers enter their 60s. And with the youngest of the Baby Boomers hitting exactly that inflection point, the largest segment of the population—77 million strong in 2011—is beginning to retire. This contraction will only intensify in the years ahead. By 2030, a fifth of the population will be over 65 years of age, up from 13 percent in 2010.
But there’s a lot more to the story than aging.
If we consider only prime-age workers—those between 25 and 54 years old—which holds aside the effect of population aging, the picture barely changes. The magnitudes are less dramatic, but the tendencies are similar.
Let’s start with the prime-age E-P ratio, which fell from its norm of 79–80 percent in the five years leading up to the recession, to 75.1 percent in 2010 and 2011. It has rebounded somewhat faster than the E-P ratio for the population as a whole, up to 75.9 percent in 2013 and 76.6 percent in the first seven months of 2014—but it has still only recovered only a bit more than a third of its recessionary loss. The figure below makes plain just how much the pattern for the prime-aged has mirrored overall trends.
Perhaps the most troubling aspect of the labor market situation for prime-age workers has been their LFPR. In 2007, their participation rate was at 83.0 percent and it hardly changed during the recession, remaining above 82.0 percent from January 2009 through June 2010 and averaging 82.8 percent during that span.
Fair enough. We would expect prime-age workers to remain more tied to the labor market than older or younger workers during a downturn.
But as economic conditions have improved, prime-age labor force participation has actually fallen, to 81.5 percent in 2011–12 and further still, to 80.9 percent since September 2013. The decline has been mostly driven by men, whose participation rate has fallen 2.8 percentage points since 2007, to 88.0 percent, though the rate for women has also dropped, by 1.8 percentage points, to 73.6.
As with the population as a whole, the “good” news on the prime-age front has been unemployment. Prime-age workers were hit with unemployment even harder (in relative terms) than the workforce as a whole. Their unemployment rate increased by a factor of 2.4 (compared to 2.2 for the population overall), from 3.7 percent in 2007 to 9.0 percent in October 2009.
The pace of recovery has matched the pattern of the general population: tepid at first, but accelerating in the last year or so. At 4.9 percent in September 2014, prime-age unemployment is about three-quarters of the way back to its pre-recession norm.
Putting it all together, it’s clear that the unemployment rate is only part of the labor market story—the positive part.
In the figure below, I plot the recovery rates of the three key labor market indicators: the employment rate (which is just the opposite of the unemployment rate), the labor force participation rate, and the employment-population ratio. The figure shows the “recovery rates”—that is, far, in percentage terms, each indicator is from its pre-recession (2007 average) level. The data is for prime-age workers, but the picture for the overall population is qualitatively similar.
What we see is that trends in employment and participation couldn’t be more different.
While the employment rate is back to 98.8 percent of its pre-recession level (after dropping as low as 94.5 percent), labor force participation has more or less been steadily declining, and is now at 97.2 percent of its 2007 level. As a result, the employment-population ratio, which incorporates the effects of the other two, dropped further and has recovered more slowly than the employment rate, sitting at just 96.0 percent of its pre-recession standard.
As discussed above, the E-P ratio, particularly for prime-age workers, is perhaps the most important employment indicator, and definitely more informative than the employment rate alone.
The next figure highlights the discrepancy. The employment rate has recovered 77.1 percent of its recessionary loss, but the E-P ratio has regained less than half that: 37.3 percent.
If what we care about is the share of potential workers who are working (rather than simply the share of successful job seekers), the E-P ratio is what we ought to pay attention to. And by this measure, the recovery still has a long way to go. Were the E-P ratio back at its 2007 level, we would have four million more prime-age Americans working.
But work is not all there is to life. Voluntary decisions to withdraw from the labor force—whether to retire, obtain additional schooling, or pursue non-market interests—can be welfare-enhancing. So a declining E-P ratio may or may not be troubling. Much turns on what factors are driving the trends—-and among which groups.
In other words, we need to know more about the people who are working less than they desire. People who meet this description are referred to as underemployed. This is the population segment suffering the worst labor market welfare. Policy should prioritize their needs.
Fortunately, economists do have methods for measuring underemployment.
The most comprehensive of these measures is the so-called “U-6” rate, which the Bureau of Labor Statistics (BLS) publishes monthly. The best way to think of it is as a sort of “super” unemployment rate.
To compute the U-6 rate, BLS starts with the familiar unemployment rate, then adds in two additional groups: people marginally attached to the labor force, and those who involuntarily work part-time.
The marginally attached—who are not considered part of the labor force—are those people who want a job, are currently available for work, and have looked for it in the past year, but are still jobless. (A subset of the marginally attached are the already-discussed discouraged workers—those who give economy-related reasons for not looking for work in the past four weeks.) Involuntary part-timers are those who want to work full-time.
The figure below traces the U-6 rate, and its composition, since 2000.
Once again, the unemployment rate is (literally) only half the story. The underemployment rate, which averaged 8.3 percent in 2007, took off in 2008 and rose dramatically through 2009, peaking slightly after the unemployment rate in April 2010, at 17.2 percent.
By the conventional unemployment measure, employment fell to 94.9 percent of its pre-recession level, and has since rebounded to 98.7 percent; but by the broader underemployment standard, employment fell to 90.3 percent of its pre-recession norm, and has recovered only to 96.2 percent.
If we compare the ranks of discouraged, marginally attached, and involuntary part-time workers in July 2014 to their numbers in July 2007, the point is clearer still. These categories are all significantly further above their pre-recession norms than the unemployed. Particularly alarming: there are twice as many discouraged workers today as there were in 2007.
What does this mean in real terms?
On a non-seasonally adjusted basis, 17.9 million Americans were underemployed in September 2014.
Of these, only about half (9 million) were counted as officially “unemployed.” Another 6.7 million were employed part-time for economic reasons, and 2.2 million were marginally attached to the labor force (including 0.7 million discouraged workers).
Since October 2008, the underemployment rate has remained at or above its previous record high of 11.8 percent, set in 1994 (which is also when BLS began keeping track of this measure). The good news is that, after years of steady decline, underemployment returned to 11.8 percent in September 2014, its lowest mark in 72 months.
Reliance on the unemployment rate to gauge the health of the labor market is overly simple for another reason: a single number masks important distinctions in the types of people who are unemployed. And it’s the composition of the unemployed workforce that poses some of the greatest challenges to our recovery.
Indeed, one of the enduring legacies of the Great Recession has been its contribution to long-term unemployment.
Long-term unemployment is defined as unemployment lasting twenty-seven weeks or more. Usually, the long-term unemployed are only a small share of the total. From 2000 to 2007, long-term unemployment averaged 18 percent of overall unemployment; its standalone rate was a scant 0.9 percent.
The Great Recession changed all that.
Even at its worst, short-term unemployment did not stray too far from the norm. In May 2007, at its peak, short-term unemployment rose to just 6.9 percent, an 82 percent increase from 2007. By contrast, long-term unemployment increased to a high of 4.4 percent of the workforce by April 2010, an increase of over 400 percent. At this point, it accounted for nearly half (45 percent) of overall unemployment.
Since then, things have been slow to improve.
While short-term unemployment has dropped to 4.0 percent in September 2014, just 6.1 percent above its 2007 average, long-term unemployment remains at 1.9 percent—still 133 percent above what it was in 2007.
So today, a much greater portion of the unemployed have been there for a long time. (And remember, these statistics don’t include former workers who’ve dropped out of the labor force entirely.)
Why does this changing characteristic of unemployment matter?
Well, the plight of the long-term unemployed is qualitatively different than that those out of work for only a few weeks or months. As workers sit on the sidelines, their skills can erode, which makes re-entry more difficult. At the same time, the stigma of idleness makes it more difficult for long-dormant applicants to make their case to employers.
Together, these factors create a self-fulfilling prophesy: the longer workers are out of work, the more difficult it becomes to find a job, which keeps them out of work longer still. Many stop looking completely, further shrinking our labor force.
Such protracted spells of labor inactivity or underutilization can create serious problems for an economy’s productive potential. If long-term unemployment prevents otherwise able workers from engaging in productive activity, the economy is deprived of potential output, safety nets are strained, and standards of living rise more slowly than would otherwise be the case.
Economists have a term for this sort of long-term damage: hysteresis. It refers to the potential of transient shocks to create permanent damage to an economy.
The upshot is that harms of long-term unemployment can affect more than the unemployed themselves—the aftershocks spill-over to the rest of us, as well.
Focusing solely on the unemployment rate obscures this very real danger.
One final weakness in the headline unemployment statistics: they tell us about jobs lost or gained, but they completely silent as to whether the jobs in question are any good.
The Great Recession has had an effect on the nature of work itself. The considerable slack that is lingering in the labor market has resulted in little pressure on wages, and so workers in 2014 are earning little more than they did in 2007.
According to the BLS Establishment Survey, average weekly earnings (the product of average hours and average hourly earnings) were $848.74 in September 2014, up 3.6 percent since 2007 in real terms. Three percent in seven years isn’t good—that’s a raise of about half a percent a year.
Sadly, there’s more (that is, less) to the story.
The figure below shows that the 3.6 percent improvement since 2007 masks a more complicated story.
After real average weekly earnings stagnated in the early years of the recession and dropped to their nadir in May 2009, at $813.94, they abruptly increased 3.0 percent by October 2010, to $837.97.
But since then, except for minor monthly blips, earnings have basically been flat, increasing a mere 1.3 percent over the past 48 months.
Economic theory tells us that workers should be paid based on what they produce—worker compensation should keep pace with growth in worker productivity. So if wages are remaining flat, then we might reasonably assume that worker productivity is also flat.
Such an assumption would be wrong.
Beginning in the 1970, compensation and productivity began to diverge. As the chart below shows, productivity has continued to increase strongly, especially with the introduction of increasingly advanced information technology. Wages, however, have not kept pace.
From 1947 to 1970, real productivity in the nonfarm business sector, as measured by BLS’ Labor Productivity and Costs (LPC) program, grew at an average annual rate of 2.6 percent. Real hourly labor compensation was not far off, growing at 2.5 percent annually.
But since 1970, productivity has grown at twice the rate of compensation, 1.94 percent annually versus 0.98 percent.
The divergence has been largest since 2000, with labor productivity growing at nearly four times the rate of wages and benefits (1.98 percent versus 0.56 percent). In all, productivity is up 323 percent since 1947, while compensation has increased just 177 percent.
The story since the Great Recession is much the same. Since 2007, productivity has grown 10.2 percent, while hourly compensation is up a scant 1.4 percent (and has tended to hover around zero).
Why have earnings grown so slowly in comparison to productivity?
There’s two leading explanations: labor’s declining share of U.S. income and the rise in income inequality.
Labor’s share of gross domestic income (GDI)—or the sum of all incomes earned in an economy in a given year—indicates the extent to which the benefits of economic growth translate into improvements in living standards. Generally speaking, the higher is labor’s share of income, the more broadly prosperity is shared.
From 1952 until 2005, labor’s share of income did not fall below 54 percent. But since the end of the Great Recession, it has not been above 54 percent, falling to a modern low of 52.1 percent in 2013—a level not seen since 1942.
But’s that not even the whole story. The labor income we’ve been discussing is total compensation, which includes non-cash benefits, like health insurance. If we focus just on wages, which for most people is their most valued compensation, the picture becomes worse.
Between 1948 and 1974, wages held steady at half of GDI. Since then, wages have steadily eroded as a share of national income, dropping below 47 percent in the 1980s and 46 percent in the 1990s. In the aftermath of the Great Recession, it fell below 43 percent, and to a historic low of 41.9 percent in 2013.
The second source of wage stagnation is the vast rise in income inequality the U.S. has experienced since the 1970s. Not only is the labor pie smaller, but it is also being shared less broadly.
This isn’t news to anyone. One of the continuing legacies of the Great Recession is that it has made income inequality part of the national conversation. It turned Thomas Piketty into a household name and Mitt Romney into an afterthought.
Nonetheless, it is worth reminding ourselves just how staggering the inequality trends have been.
Economists use a something called the Gini coefficient to measure inequality. The Gini only ranges from 0 (perfect equality—everyone has the same income) to 1 (perfect inequality—one person has everything).
Between 1970 and 2012, according to survey data compiled by the Census Bureau, the Gini coefficient for U.S. household income rose 21 percent, from 0.39 to 0.48—among the highest among advanced democracies.
Actually, even this might be understating things. It is notoriously difficult for surveys to capture top incomes, so researchers wanting to capture the full effect of income growth among the top 1 percent of earners turn to tax records instead. Recently, when the Congressional Budget Office conducted exactly this sort of exercise, it found the U.S. Gini to be 0.59—far higher than previously imagined.
By way of comparison, the most unequal countries in the world are South Africa (0.63), Honduras (0.57), and Rwanda (0.51). Not exactly the type of company countries like to keep.
In short, productivity gains aren’t going to the workers responsible for that increased productivity. Instead, the enormous advances made possible by new technologies have been captured by superstar CEOs and the fortunate few capitalists who derive large shares of their incomes from investments in lucrative corporations and businesses.
Indeed, prior to 2004 corporate profits had never exceed 8 percent of GDP. But since 2004, corporate profits have exceed 9 percent nearly every year. Even in the recession years of 2008 and 2009, corporate profits remained well above the historical average of 5.2 percent. In 2012 and 2013, they’ve topped double digits for the first time.
To summarize, the unemployment rate is an insufficient indicator of labor market health. Though things are improving—as evidenced by job growth and falling unemployment—things are not as rosy at the headline figures suggest. Labor force participation is falling, even among prime-age workers. And the most comprehensive measure of the labor market, the employment-population ratio, has scarcely recovered its recessionary losses.
At the same time, measures of underemployment provide a more complete picture of labor market hardship. When we include discouraged workers and involuntary part-timers, the number of unsatisfied workers doubles from the number the unemployment rate alone suggests. More troubling still is the persistence of long-term unemployment, which has the potential to undermine the economy’s productive potential for years to come.
As a final indicator, consider the so-called “jobs gap.” The jobs gaps refers to the cumulative number of jobs lost or gained since the recession. Much has been made recently of nonfarm jobs finally surpassing pre-recession levels in May 2014.
But this is hardly the goal we should be aiming for. Why? The population has also grown during the past seven years—to the tune of 15 million for the civilian noninstitutional population 16 and older—so 139 million jobs isn’t worth the same today as it was in 2007.
The figure below highlights just how large of a gap remains. The lighter line is simply the actual cumulative change in payroll employment we’ve had since 2007. At our worst, in December 2009, we were out some 8 million jobs; as of September 2014, we’re 550,000 in the positive.
The darker line, however, factors in population growth.
By this adjusted (and more reasonable) standard, the recession put us in a jobs deficit of 10.1 million in December 2009. While the red line, like the black line, still trending upwards, the true recovery has been far slower than the raw numbers suggest. As of September 2014, we’re still in the hole by 5.2 million jobs; in other words, for the same proportion of Americans in each age-sex group to be working today as were working in 2007, we’d need 5.2 million more jobs.
So, looking behind the headlines statistics, we’re far from a full jobs recovery—in fact, by the jobs gap measure, we’re barely at the halfway point. As with labor force participation, underemployment, and wages, when we add context and nuance to the story, a growing labor market gets knocked down a few notches.
In other words, the labor market is acting a lot like a puffy-chested teen who thinks he knows all there is to know about the world at the tender age of 17. And commentators right now are only stroking its ego.
Instead, what we need is to play the role of wise mentor, reminding our cocky youth that a growth spurt is not the same as being grown up. The promise of a flourishing adulthood are there, sure enough, but the magnitude of future accomplishments depend upon a shot of humility and a dose of redoubled dedication today.
The first step in understanding the labor market is to know how key concepts are defined. Indeed, much of the confusion in popular discussions of the labor market occurs when people—experts included—misinterpret important terms. So let’s pause for a moment to discuss how key labor market indicators are constructed and measured.
Key Labor Market Concepts
The place to begin is with the basic concepts—for example, what it means to be “employed” or unemployed.” It is from these concepts that indicators are derived. Although each of these concepts has a precise definition, colloquial usage can obscure formal meaning. Perhaps the greatest source of confusion is how the various concepts relate to each other—an issue that is easily resolved when the concepts are presented in their taxonomy (or hierarchical classification), as in the chart below.
Discouraged Workers: the subset of Marginally Attached Workers who give economic reasons for not looking for work. Such reasons can include lack of necessary qualifications or no jobs available in occupation.
Employed: the members of the population who have a job. Or, more technically, the members of the population who work for pay or profit. The employed include full-time, part-time, and temporary workers, as well as unpaid family workers.
Involuntary Part-Time: the members of the population who have part-time employment but want full-time work.
Marginally Attached Workers: the members of the population who want a job, are currently available to work, and who have looked for work in the last 12 months, but not in the last four weeks.
Population: the number of people who are older than 16 years, are not in an institution (e.g., prison, home for the aged, or a mental health institution), and who are not members of the armed forces.
Unattached Workers: the members of the population who neither work nor wish to work. Unattached workers include students and retirees.
Unemployed: the members of the population who are jobless, have actively looked for work in the last four weeks, and are currently available for work.
Key Labor Market Indicators
Once we have a organized understanding of the concepts, defining key labor market indicator indicators becomes a matter of constructing simple fractions.
Unemployment Rate = Unemployed / Labor Force
Labor Force Participation Rate = (Employed + Unemployed) / Population
Employment to Population Ratio (E-P Ratio) = Employed / Population
U-6 Labor Underutilization = (Unemployed + Marginally Attached + Involuntary Part-Time) / (Labor Force + Marginally Attached + Involuntary Part-Time)
Mike Cassidy is a policy associate at The Century Foundation. He is a strong believer in the power of scientific analysis, and his research focuses on using economics to understand human behavior, especially at it relates to poverty, inequality, performance, and progress. A proud alum of Princeton’s Woodrow Wilson School, Mike holds a Master in Public Affairs with a concentration in economics and public policy. From 2007 to 2012, he worked at the New York City Office of Management and Budget, where he oversaw the city’s social service and criminal justice agencies. In his spare time, Mike is a semi-professional distance runner and competed in the 2012 U.S. Olympic Marathon Trials.
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