The missing 100 million: how the pandemic reveals the fallacy of not in labor force

Last Friday, the U.S. published the long-feared employment situation report. It should come as no surprise to anyone since U.S. businesses were quick to lay off employees since much of the economy was shut down to abate the spread of the coronavirus.

I've been following employment statistics for a while. Chapter 6 of Numbersense (link) addresses the statistical aspects of how the unemployment rate is computed. The title of the chapter is "Are they new jobs when no one can apply?" What you learn is that the final number being published starts off as survey tallies, which then undergo a variety of statistical adjustments.

One such adjustment - which ought to be controversial - results in the disappearance of 100 million Americans. I mean, that they are invisible to the Bureau of Labor Statistics (BLS), considered neither employed nor unemployed. You don't hear about them because the media report the "headline" unemployment rate, which excludes these people. They are officially designated "not in the labor force". I'll come back to this topic later in the post.

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Last year, I used a pair of charts to visualize the unemployment statistics. I have updated the charts to include all of 2019 and 2020 up to April, the just released numbers.

The first chart shows the trend in the official unemployment rate ("U3") from 1990 to present. It's color-coded so that the periods of high unemployment are red, and the periods of low unemployment are blue. This color code will come in handy for the next chart.

The time series is smoothed. However, I had to exclude the April 2020 outlier from the smoother.

The next plot, a scatter plot, highlights two of the more debatable definitions used by the BLS. On the horizontal axis, I plot the proportion of employed people who have part-time jobs. People only need to have worked one hour in a month to be counted as employed. On the vertical axis, I plot the proportion of the population who are labeled "not in labor force". These are people who are not employed and not counted in the unemployment rate.

The value of data visualization is its ability to reveal insights about the data. I'm happy to report that this design succeeded.

Previously, we learned that (a) part-timers as a proportion of employment tend to increase during periods of worsening unemployment (red dots moving right) while decreasing during periods of improving employment (blue dots moving left); and (b) despite the overall unemployment rate being about the same in 2007 and 2017, the employment situation was vastly different in the sense that the labor force has shrunk significantly during the recession and never returned to normal. These two insights are still found at the bottom right corner of the chart. The 2019 situation did not differ much from 2018.

What is the effect of the current Covid-19 pandemic?

On both dimensions, we have broken records since 1990. The proportion of people designated not in labor force was already the worst in three decades before the pandemic, and now it has almost reached 40 percent of the population!

Remember these people are invisible to the media, neither employed nor unemployed. Back in February 2020, with unemployment rate at around 4 percent, it's absolutely not the case that 96 pecent of the employment-age population was employed. The number of employed Americans was just under 160 million. The population 16 years and older at the time was 260 million.

Who are these 100 million people? BLS says all but 2 million of these are people who "do not want a job". Some of them are retired. There are about 50 million Americans above 65 years old although 25 percent of them are still in the labor force, so only 38 million are "not in labor force," according to this Census report.

It would seem like the majority of these people don't want to work, are not paid enough to work, etc. Since part-time workers are counted as employed, with as little as one working hour per month, these are not the gig workers, not Uber/Lyft drivers, and not college students who has work-study or part-time jobs.

This category has long been suspect, and what happened in April isn't going to help build its case. There is no reason why the "not in labor force" group should spike immediately as a result of the pandemic. It's not plausible to argue that people who lost their jobs in the last few weeks suddenly turned into people who "do not want a job". I think this spike is solid evidence that the unemployed have been hiding inside the not in labor force number.

The unemployment rate has under-reported unemployment because many of the unemployed have been taken out of the labor force based on BLS criteria. The recovery of jobs since the Great Recession is partially nullified since the jump in "not in labor force" never returned to the prior level.

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The other dimension, part-time employment, also showed a striking divergence from the past behavior. Typically, when the unemployment rate deteriorates, the proportion of employed people who have part-time jobs increases. However, in the current situation, not only is that not happening, but the proportion of part-timers plunged to a level not seen in the last 30 years.

This suggests that employers are getting rid of their part-time work force first.

 

 

Comments

[Ken]

In Australia it gets even worse. We have a government initiative that pays businesses to employ people even though they aren't doing work, so they are ready to work when things improve. It also means that they are employed. Even if they do nothing, these are considered as employed, although they receive less pay than when they were employed. It is an idea we stole from Europe. So our unemployment went from a bit over 5% to 6%. Looks great, but our participation also dropped by a bit over 2% and our underemployment went from nearly 9% to nearly 14%. This extra 5% would consist of many of the people who are now not working but are receiving a lower income, so want more. Eventually this assistance will end and many will be unemployed, and we will have 10%+ unemployment.

[Kaiser]

Ken: I would not be opposed to having this period footnoted as an outlier as the shutdown of the economy is a one-time unprecedented event. I'm more concerned about the routine use of "not in labor force" which is clearly misleading. The biggest problem with this definition is that the target of any government should be zero unemployment since all the people who "don't want to work" are not counted.

[Ken]

Kaiser: getting back to your post, it is a complex issue. I'm likely to retire early. I probably won't look for part-time work, but if I get offered the right work I may well accept. So I will be not in the workforce when I'm unemployed and in the workforce when I am. If however I decide I want some work then I will be unemployed. Possibly a solution is to expand the definition of in the workforce to include people who are willing to work.