Economic conspiracy or economic mistake?

Charles Wilson
Columnist

Over the last two months, the unemployment rate unexpectedly plummeted from 8.3 percent to 7.8 percent, bringing the headline unemployment number, which is the most cited labor market index, below the psychological barrier of 8 percent for the first time in 43 months.

Good news, right?

Think again.

Normally, economic conditions that coincide with such a steep decline in the jobless rate reflect an underlying improvement in the general measurements of economic activity, further reflecting a genuine recovery.

The recent drop in unemployment, however, is unprecedented since we’ve been getting mostly poor economic data for all of 2012, particularly during this last quarter from which these numbers came.

For instance, real gross domestic product (GDP) grew at a sluggish pace of 1.3 percent for the second quarter of 2012 and is forecasted to remain in that range or worse for the rest of the year since many important economic indicators, such as manufacturing durable goods and factory orders have turned into negative territory.

Economic growth that low is consistent with stagnant incomes and rising unemployment, if not outright recession. Empirical studies show that an economy needs at least a growth rate of 3 percent to increase standard of living and decrease unemployment.

Jimmy Pethokoukis, a columnist at the American Enterprise Institute, shows that during the 1990s when the unemployment rate fell by an equivalent rate, we were getting economic growth rates closer to 5 percent, not 1.3 percent.

So what is so different this time? Why is the unemployment rate falling with such a slow growth economy?

This is actually because of a few reasons, one of which is a decline in the labor force participation rate (the ratio between the labor force and the overall size of their cohort).

Millions of Americans have given up hope of finding employment and no longer report their employment status to the government, causing the headline unemployment number to fall. Technically, the unemployment rate could fall back to 4 percent if enough people give up all desire and leave the labor force.

Another reason for the disparity is that the headline unemployment number does not take into account full-time versus part-time jobs. Of the 800,000 reported job gains, 572,000 came from workers that gained part-time jobs.

In fact, there are fewer full-time employed people today than there were six months ago. John Taylor, a Stanford University economist, recently wrote how surges in part-time hiring are consistent with economic downturns rather than growth periods.

In other words, an increase in part-time jobs can push down the unemployment rate, but it’s actually a sign of a depressed economy.

Another major reason for last month’s decline in unemployment was from the household survey showing an increase in employment of over 800,000 jobs, according to the Bureau of Labor Statistics.

Every expert who looked at that number either believes it’s due to a horrible sampling error or from outright manipulation of the data from the Department of Labor officials.

Either way, don’t expect that type of number to continue with 1 percent economic growth.

In order to accurately measure the health of the labor market economists prefer to look at people employed rather than unemployed.

So instead of focusing too much attention on the headline unemployment number, economists prefer the employment to population index, which tracks the number of people with a job within the working ages of 16 to 65. This index shows the real truth behind the numbers and things are not pretty.

After dramatically declining during the great recession, the employment to population ratio has remained in the dumps, with absolutely no improvements over the past three years. Stagnant employment is what you would expect with the weak recovery we are receiving.

The only problem is that it doesn’t show up in every statistic, allowing the media and certain politicians to get away with the fabrication that things are getting better and we’re finally moving forward again.