On January 7, the U.S. Bureau of Labor Statistics (BLS) issued its Employment Situation report for the month of December. On the surface, the news appeared very good: The national unemployment rate dropped 0.4% from 9.8% to 9.4%. That is the lowest rate of unemployment we’ve experienced in nearly two years (April 2009 was the last month unemployment that was under 9%). And nonfarm payroll employment increased in December by 103,000. However, financial markets reacted with some pessimism that day. Overall, the S&P 500 declined 0.2% while broader indices also registered slight declines.

There are several reasons for this reaction to what should have been very good news regarding the employment situation. One reason is that the BLS actually conducts two surveys of the national employment situation. One is a sampling of households to statistically estimate the size of the civilian labor force—those employed, unemployed but actively seeking work, and those who would like a job but have ceased an active search. Based on this survey (and statistical analysis), the BLS estimated the size of the civilian labor force shrunk by 260,000 since November. That is not a good sign for a country where population growth is slightly less than 1%.

The household survey also estimated that the number of employed individuals increased by 297,000 between November and December—not much different in magnitude than the decline in the civilian labor force. The change in the number of unemployed is calculated as the difference: 297,000 more employed minus 260,000 fewer workers in the civilian labor force, or a decline of 556,000 out of about 14.5 million total unemployed. And as the table below illustrates, it’s the combination of these estimates that resulted in the decline for the unemployment rate from 9.8% for November to 9.4% for December.

 

Size in Thousands	November	December	Change
Civilian Labor Force	153,950	153,690	-260
Employed	138,909	139,206	+297
Unemployed	15,041	14,485	-556
Unemployment Rate: (3) divided by (1)	9.8%	9.4%

Source: U.S. Bureau of Labor Statistics

However, the BLS also conducts a separate survey that samples employers and attempts to estimate how many payroll jobs were created each month. And this estimate, the count of nonfarm payroll employment, only increased by 103,000 (relative to the estimate of 297,000 more people employed in December). The BLS also puts statistical confidence levels around both these estimates to help understand the risk that either number may not be significantly different than zero for the entire population. For the household survey, that increase is at least 400,000 and for the employment survey it is 100,000. Hence, neither survey provided convincing evidence that the level of employment is increasing, despite the apparent large drop in the unemployment rate.

Looking at the longer-term picture, the chart below helps illustrate how the size of the civilian labor force, which grew from slightly less than 143 million people in January 2000 to 155 million at the end of 2007 (paralleling the growth of our country’s population) has since flatlined despite continued population growth. Total employment reached a peak of 146 million in August 2007 and has since declined by 7 million to 139 million, while unemployment has increased from what economists define as “frictional” (the regular churn of people in and out of jobs in an economy that is otherwise fully employed) of 7 million to slightly over 14 million.

But as the unemployment rate has stagnated in a range of approximately 9.5% over the past 20 months, the tenure or length of unemployment has shot up to unprecedented levels. The chart below illustrates the average and median length of unemployment for those actively seeking work going back to 1967. For the average, the long-term value is 14 weeks while for the median (which is not skewed by extreme values in either direction), the long-term value is approximately 7 weeks. Based on the December Employment Situation report from the BLS, these values are now 34.2 weeks (average), up 0.3 weeks from November and only slightly less than the peak of 34.8 week of last June, and 22.4 weeks (median), up 0.7 weeks from November but down considerably from the peak of 25.5 weeks last June.

These data suggest an additional challenge to solving our nation’s chronically high unemployment rate. As the chart below illustrates, the reason why the average duration of unemployment remains near a record high while the median rate is slowly declining is that we have a growing population of unemployed (again, actively seeking work) who have been unemployed for at least half a year (27 weeks or longer). As illustrated by the oval on the chart, which highlights the trend in the absolute number of unemployed, the trend in the number or those unemployed at least half a year is growing while those unemployed for shorter periods—whether less than 5 weeks, 5 to 14 weeks or 15 to 26 weeks—has been on a decline. The result of these trends is the percent of all unemployed whose tenure of unemployment has exceeded at least 27 weeks or longer now accounts for nearly half (45%) of all the unemployed.

 

These charts and trends help illuminate the policy challenges surrounding achieving a meaningful and lasting reduction in overall unemployment. The ranks of the unemployed have evolved into two tiers. In one are those who lose their jobs but within a relatively short time frame (under six months) are able to find new employment. Then there is the tier that continues to struggle finding work even beyond this time frame. This is the group that is growing in number. And it is a reason why we see the overall average length of time for someone to be unemployed continue to rise.

Some have pointed to continued problems in the housing market as a contributing factor. When a person’s home is underwater (mortgage value greater than the resale price), there is little motivation to seek employment outside one’s immediate locale. This reduces labor mobility and can lengthen the time of unemployment. Others argue that another contributing factor is the extended jobless benefits (currently as long as 99 weeks in some cases) which might motivate some to continue searching versus accept an available job—especially if that job represents a substantial drop in income versus past positions. Those who disagree with this view point out that jobless benefits are so low that it provides little economic incentive to remain unemployed.

A third point of view is that many of these longer-term unemployed are faced with the challenge of making a career transition from jobs they previously held in industries which have undergone massive and structural (i.e., permanent) downsizing—that is to say, jobs that will never return even with a strong economic recovery. The financial services sector is certainly one example. In this case, the challenge is to provide means and opportunities to help these individuals develop new skills in functions and industries where job growth is expected to be greatest.

 

 

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In fact, the estimates of the size of the civilian labor force have declined by 830,000 between April and December of last year.

 

 

 

 

 

 

 

 

 

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