On the Employment Mess

May 8, 2012 9:45 am

Last week we were all treated to a report on the unemployment situation in the U.S. that was not pretty.

Sure, on the surface the “official” unemployment rate of 8.1% looked good and that was a nice splash for the media to publish. But, beneath the number there were several areas that concerned investors and hence the sell-off.

Probably the most important of those was the slide in the labor participation rate. Now down to the lowest in decades, it is clear that the only reason that there is an improving rate for unemployment is that the calculation is flawed.

 

Looking at the workforce, it is clear that the number of people (approx 3 million since 2007) leaving as there are no prospects for them to achieve gainful employment is key.

As I consider the comments from President Obama a few months ago when he promised a rate below 8% by the election, I now realize that his crack actuarial staff looked at the unemployment compensation benefit roll and figured how many would be falling off and therefore no longer in the workforce. Extrapolating that out showed that there was a high likelihood of the unemployment rate falling as the labor participation rate also declined.

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