The US labour market might be weaker than the unemployment rate suggests

When the Bureau of Labor Statistics released its newest jobs report a little over three weeks ago, economic forecasters and analysts received some welcome news: the unemployment rate had held steady at 4.9 percent for the month of August. Not long after the release, several members of the Federal Reserve’s Federal Open Market Committee (FOMC) began talking about an imminent interest rate hike, noting that the economy was operating at close to full employment.

A recent report from CEPR challenges this narrative. The report — titled The Case for a Weak Labor Market — argues that a large number of non-employed workers who want jobs simply aren’t being counted in the unemployment rate.

In 2007, there were approximately 7.1 million unemployed Americans. There were also an additional 4.7 million Americans not in the labor force —the “labor force” being defined as the number of people who are either employed or unemployed — who said they wanted to work. These 4.7 million people weren’t counted as “unemployed” because they hadn’t searched for work during the previous four weeks. But in total, there were about 11.8 million non-employed Americans who wanted to find jobs.

The most recent labor market data show that there are currently about 7.8 million unemployed workers. Given demographic shifts and moderate population growth, this isn’t dramatically out of line with the number of workers unemployed in 2007. However, there are now almost six million Americans out of the labor force who say they want a job — meaning that the number of non-employed people looking for work is far higher than the unemployment rate implies.

The aging of the population does not explain this trend. In the year leading up to the recession, just 9.7 percent of prime-age (25–54) Americans not in the labor force said they wanted a job. Over the past year, it’s been 10.5 percent. The increase is nearly identical for older workers. Between September 2015 and August 2016, 3.0 percent of Americans aged 55 and older not in the labor force said they wanted a job, compared to just 2.2 percent in 2007. A far more likely culprit is the lingering economic weakness from the 2008 recession. Table 1 below shows the percentages of all people that want a job broken into three broad categories for 2007 compared to the past year.

While the economy has improved significantly over the past eight years, the experiences of being employed and unemployed today are much different than in 2007. Take for example the share of workers employed sufficient hours, which is down 1.7 percentage points relative to 2007.[1] This indicates that fewer workers are working the amount of hours they’d like to be. On the other hand, the share of workers who are underemployed, or working part-time involuntarily, is up nearly one percentage point. These workers are still counted as being employed; however, they are working part time hours because they are unable to find full time positions. In other words, these workers are still experiencing economic hardship.

In terms of the unemployed, long-term unemployment is up 0.5 percentage points and accounts for over 100 percent of the increase in unemployment, while short term unemployment is down relative to 2007. This indicates that being unemployed today is worse than being unemployed in 2007, since many individuals are staying out of a job much longer. Long-term unemployment brings a slew of hardships not necessarily experienced for those who are short-term unemployed, including depression, suicidal thoughts, and other problems. While the unemployment rate is near its 2007 average, those who are unemployed are experiencing more hardship than in 2007 since a larger share of them are experiencing long-term unemployment.

Looking at the bigger picture, “employed sufficient hours” and short-term unemployment are down nearly two percentage points, meaning the other four groups — the under-employed, the long-term unemployed, marginally attached workers, and other job wanters — are up nearly two percentage points. Job wanters include individuals who say they want a job and have searched for a job within the past 12 months, but not the past four weeks (also known as marginally attached workers) and people who say they want a job but haven’t searched within the past 12 months (also known as other job wanters). These individuals, who account for 3.6 percent of everyone who wants a job, are not captured in the unemployment rate. However, many of these people would likely return to work if there were more opportunities in the labor market.

For these reasons, the unemployment rate is not as accurate a measure of labor market tightness as it was in prior years.

[1] Those working full time or voluntarily working part time.