Stop Looking at the Unemployment Rate: The New York Example

 by Ray Keating

The Keating Files – October 20, 2020

 

Throughout my career as an economist, one of my pet peeves has been the unemployment rate. It’s widely cited by the media, politicians, and even fellow economists, yet it can be a grossly misleading economic indicator.

 

Why does the unemployment rate get so much attention? Well, it’s supposedly a straightforward picture of what’s happening in terms of jobs. After all, if the unemployment rate increases, that’s bad news; and if the unemployment rate drops, that’s good news. So, if you need a reliable number that tells the story on people working or not, just look at the unemployment rate, right? Well, no.

It turns out that a rise in the unemployment rate can occur when the jobs market is improving, and a drop in the unemployment rate can happen when the employment situation is getting worse.

 

The latest jobs data on New York provides an example that probably would surprise most. 

 

For September, the U.S. Bureau of Labor Statistics reported that the New York unemployment rate dropped from 12.5 percent in August to 9.7 percent in September. In addition, the number of unemployed declined from 1.19 million in August to 884,650 in September. 

 

That all great, right? Again, the answer is a resounding “no.” 

 

It turns out that the labor force in New York declined from 9.5 million in August to 9.13 million in September, and employment actually dropped from 8.31 million in August to 8.25 million in September. That is, the labor force decline by 362,889 and employment fell by 60,867.

 

Wait, employment fell and the unemployment rate declined? How does that work? Well, it turns out that the decline in the unemployment rate was all about a declining labor force. The unemployment rate is calculated as the number of unemployed as a share of the labor force. Leave the labor force, and you’re no longer counted. 

 

So, New York’s unemployment rate didn’t fall in September because the number of employed increased (indeed, the number of employed actually fell), but because a large chunk of people simply left the labor force altogether.

 

What’s better than the unemployment rate in terms of gauging the jobs market? Two measures – the labor force participation rate and the employment-population ratio. And it turns out that both declined in New York in September. 

 

The New York labor force participation rate (the percentage of the civilian noninstitutional population 16 years and older that is working or looking for work) declined from 60.8 percent in August to 58.5 percent in September, which is a drastic falloff. And the employment-population ratio (the percentage of the civilian noninstitutional population that is employed) in New York dropped from 53.2 percent in August to 52.8 percent in September.

 

So, to get the real story on the jobs market, toss aside the unemployment rate, and look at the numbers that actually matter. When doing that, it turns out that the jobs story for New York in September was quite negative.

 

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“Character-Rich Sci-Fi: Take the Netflix Journey with ‘Away’”

 

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Ray Keating is a columnist, novelist, economist, podcaster and entrepreneur.  You can order his new book Behind Enemy Lines: Conservative Communiques from Left-Wing New York  from Amazon or signed books  at RayKeatingOnline.com. His other recent nonfiction book is Free Trade Rocks! 10 Points on International Trade Everyone Should Know. The views expressed here are his own – after all, no one else should be held responsible for this stuff, right?

 

Keating’s latest novel is  The Traitor: A Pastor Stephen Grant Novel, which is the 12thbook in the series. The best way to fully enjoy Ray Keating’s Pastor Stephen Grant thrillers and mysteries is to join the Pastor Stephen Grant Fellowship! For the BEST VALUE, consider the Book of the Month Club.  Check it all out at https://www.patreon.com/pastorstephengrantfellowship

 

Also, tune in to Ray Keating’s podcasts – the PRESS CLUB C Podcast  and the Free Enterprise in Three Minutes Podcast  

 

Check out Ray Keating’s Disney news and entertainment site at www.DisneyBizJournal.com.

Free Enterprise in Three Minutes with Ray Keating – Episode #77: The Unemployment Rate is a Useless Economic Indicator

In this episode, Ray explains why the unemployment rate ranks as the most useless economic measure that gains the widest attention among economists, the media, investors, money managers and policymakers. Tune in here!

The COVID-19 Crisis: Our Crushed Economy

Part I of a Projected Three-Part Series

by Ray Keating

The Keating Files – May 15, 2020

Make no mistake, the coronavirus pandemic and resulting government shutdowns of large parts of economy have had devastating effects across our economy, and the impact will not be quickly reversed. In fact, with misguided policymaking after COVID-19 has come under control (hopefully via vaccines and/or therapeutics), our economic ills could be further extended.

It pays to keep in mind that whenever the economy goes seriously off the rails, some kind of government action usually can be identified that either caused the mess or made it worse. In our current situation, the rapid spread of this virus, the threat to the lives of individuals, and the actual resulting deaths had their own negative consequences for the economy, and then governmental efforts – largely necessary though far from perfect (anyone who expects something even close to efficiency from government in anything doesn’t understand government) – have resulted in harsh economic consequences.

This column is not meant as an argument against what the government has done, nor as some kind of support for all that government has implemented. It’s also not meant to align with those arguing irresponsibly for an immediate, mask-less reopening of the economy with little concern, it seems, for ongoing efforts against spreading this virus. What follows is a look at key indicators describing our grim state of economic affairs.

First, real GDP (i.e., inflation-adjusted gross domestic product) in the first quarter plunged by 4.8 percent, with all major categories of economic activity declining dramatically, including consumer spending, business investment and trade. During the post-World-War-II era, there were only seven quarters when the economy declined by larger percentages.

Second, information coming in about the start of the second quarter points to an even larger drop in GDP. For example, retail sales plunged by 16.4 percent in April. That was the biggest monthly decline in a dataset going back to 1992. Industrial production – that is, the real output of the manufacturing, mining, and electric and gas utilities – tumbled by 11.2 percent in April. That was the largest monthly decline on record in an index that dates back 101 years. The drop in manufacturing production was even larger at 13.7 percent – again, biggest decline on record.

Third, jobs are disappearing at a frightening pace. Initial weekly unemployment claims over the first eight weeks of the COVID-19 crisis tallied up to 36.5 million. The story from the April employment report arguably was even worse. Perhaps most distressing was the fact that the employment-population ratio in April fell to the lowest level ever recorded in a dataset going back to 1948, plummeting from 61.1 percent in February to 60 percent in March, and then to 51.3 percent in April. 

Fourth, entrepreneurship is suffering as well. For example, the number of unincorporated self-employed individuals – an important measure of small business and startup activity – declined in April to its lowest level since January 1980. 

For good measure, the Census Bureau recently reported that business applications for tax IDs – one measure of business formation (though far from complete) – took a dive of 4.5 percent in the first quarter of this year. In addition, high-propensity business applications – which are businesses with a high likelihood to turn into businesses with payrolls – fell by 5.4 percent in April. These measures of entrepreneurial activity promise to fall further in the second quarter of this year.

Indeed, there’s nothing positive going on in the U.S. economy currently. We’re likely to see the steepest decline in economic activity during the second quarter of this year (that is, the current quarter) since the Great Depression.

After reviewing these grim numbers and trends, it’s critical to understand that these aren’t just some cold statistics detached from reality. Instead, they quantify reality. These numbers reflect or communicate real economic hardship for tens of millions of Americans across the nation. At the same time, these numbers do not negate the realities of mounting coronavirus deaths, and the understanding that the number of deaths could have been much worse, and still threaten to get worse. More on that in Part II in this series.

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Ray Keating is a columnist, economist, podcaster and entrepreneur.  You can order his new book Behind Enemy Lines: Conservative Communiques from Left-Wing New York  from Amazon or signed books at RayKeatingOnline.com. His other recent nonfiction book is Free Trade Rocks! 10 Points on International Trade Everyone Should Know. Keating also is a novelist. His latest novels are  The Traitor: A Pastor Stephen Grant Novel, which is the 12^th book in the series, and the second edition of Root of All Evil? A Pastor Stephen Grant Novel with a new Author Introduction. The views expressed here are his own – after all, no one else should be held responsible for this stuff, right?

Also, tune in to Ray Keating’s podcasts – the PRESS CLUB C Podcastand the Free Enterprise in Three Minutes Podcast