See my guest blog post today at Modeled Behavior discussing how and why the BLS is underestimating labor underutilization.
The unemployment rate has declined by 8/10 of one percent in the past five months, but part of this decline is due to an increase in the number of discouraged workers rather than unemployed workers finding a job. Officially, unemployed workers must be jobless and have looked for work in the past 4 weeks. During the recession and weak economic recovery many unemployed workers became discouraged, stopped searching for work, and are no longer counted as unemployed. As the economy gains strength they will resume their job search and this could prevent the unemployment rate from falling in 2012 or even cause it to increase.
The excess fraction of the working age population that is jobless is the employment gap. This gap should be calculated controlling for age, gender and time trend because of differences in the propensity to work across demographic groups. Adding the number of jobless workers represented by the employment gap to the natural or typical unemployment rate produces an alternative to the official unemployment rate.
The figure below shows employment/population for men age 35 to 44 and 45 to 54 from 1980 to 2011. The ratios for both groups have trended down by about 1% per decade and are about 4% below their trend values as of January 2012.
The “natural” unemployment rate for men age 35 to 44 is probably close to 3.4%, the average rate during the last half of the 1990s and from 2005 to 2007. If every jobless worker in the 4% employment gap was added to the “natural” rate the unemployment rate would be 7.9% (rather than 6.4%) in January 2012. Comparing January 2011 to January 2012 indicates that most of the 1.1% drop in the official unemployment rate was due to an increase in discouraged workers rather than a reduction in the employment gap. The decline in the employment gap over the past year would have reduced the unemployment rate by just 0.4% (8.3% to 7.9%).
Men age 45 to 54 have a “natural” unemployment rate of about 3.2%, the average during the late 1990s and from 2005 to 2007. The adjusted unemployment rate, which adds jobless workers from the employment gap to the “natural” rate, is 7.2% (rather than 6.4%) in January 2012. About 60 percent of the 1.9% drop in the official unemployment rate from January 2011 to January 2012 was due to an increase in discouraged workers rather than a narrowing of the employment gap.
The unemployment rate is normally expected to decline as the economy strengthens but this may not occur in 2012. It appears that much of the decline in the unemployment rate over the past year was due to workers becoming discouraged rather than finding jobs. The official unemployment rate could increase by 0.8% to 1.5% if these discouraged workers resumed their job search immediately. It is more likely that discouraged workers will gradually re-enter the workforce keeping the unemployment rate stubbornly high even as the economy strengthens.