Mar 11, 2018

My 2 cents on the Feb 2018 jobs report

313,000 NEW JOBS looks like a good number (as a rule of thumb anything north of 250,000 is pretty good), but this is the "headline number" as is 4.1% unemployment. Because of this there is a lot of political pressure to fudge both as much as possible, so with some peripheral perspective let's see how "real" they are.

One of the things to look at is the Labor Participation Rate. That's the number of people the government says are "in the workforce" and counted when calculating unemployment. If they can find ways to say large numbers of people who don’t have jobs are not actually unemployed, it drives unemployment numbers down, and at 4.1% that's pretty far down.

Unemployment will never be zero, and it shouldn’t be.

For years 5% was considered the optimal. Not that we don't want everyone to have jobs, but a healthy economy will always have people in various states of transition, such as moving from one job to another. A 5% unemployment rate accounts for that.

There are actually several unemployment numbers in these reports. The one that makes the news is U3 unemployment which is 4.1%, but at least two other numbers are as important to understand what’s really happening. Those are U5 unemployment which is at 5.1% and U6 unemployment which is at 8.2%.

U5 unemployment counts "marginally attached workers", workers who want to work, but haven’t looked for a job lately. U5 unemployment also includes the U4 "discouraged workers" who have stopped looking altogether.

U6 unemployment is even more interesting because it includes underemployed workers, workers forced to take part time jobs because there are no full time positions available. So when headlines say 4.1% are unemployed, they don’t mention another approximately 1% who are "marginally attached" or "discouraged", and still another 3.1% are working only part time when they want to work full time.

As if this isn’t fuzzy enough, the calculations are a little more misleading. Since both “marginally attached” and “discouraged” workers are considered to be not in the workforce, they need to be added to both the divisor and the dividend in the “the percent unemployed is equal to the number of unemployed divided by the number in the workforce” formula. On the other hand, the underemployed are already counted as being in the workforce, so their number is just added to the number of unemployed before dividing to get the percentage. To make matters even worse, “marginally attached workers” includes people who have gone back to school, and people who have become disabled. Both can be reasonably argued as not what we mean when we say unemployed. Therefore, none of the reported unemployment numbers are exact indicators Unfortunately politicians know this, and they know most voters don’t.

So if none of these is an exact indicator, are they of any use? The simple answer is yes, but they shouldn’t be considered in a vacuum. Looking at them together, and comparing their history we get a decent macro view of economic conditions, and trends. To improve on this macro view we need to look at, and analyze other areas to see what impact unemployment is having. For example if unemployment is down, that should have an impact on the already employed.

Average hours worked, and average hourly pay both inched up. To me these are confirming indicators. They suggest that there is more work to do, and it’s getting harder to find new workers to do it. This “wage pressure” has been modest, but indications are that wages are beginning to improve. And lastly, the labor participation rate has improved again.

Average hours worked, average hourly pay, and labor participation rate are all up, so I guess the jobs report is real, and not an over-inflated political marketing gimmick.