Monday, April 9, 2012

The flatlining of the Employment to Population Ratio

Last Friday's poor employment number was a reminder that the US employment picture remains fragile. In spite of the abysmally low number of jobs created (120K vs. 205K expected), the unemployment rate continues to decline. The unemployment rate is a misleading indicator however. A more indicative measure for the overall employment picture is the US Employment Population Ratio, the proportion of the US working-age population that is employed (part time or full time). And that measure (closely watched by the Fed) actually declined slightly last month.

Source: JPMorgan

Over the longer term, the Employment Population Ratio has been fairly flat as the unemployment rate kept dropping. So where is the inconsistency? One measure that explains this disconnect is called the Labor Force Participation Rate. It measures the total US labor force, combining both the employed as well as the unemployed, as a proportion of the total working age population. This measure is showing that the total labor force  has been shrinking relative to the corresponding age group. And that explains a good deal of the reduction in the unemployment rate as the number of people officially employed has been measured against an increasingly smaller labor force (with many unemployed simply exiting).

US Labor Force Participation Rate Total SA (Bloomberg)

There are numerous factors contributing to the reduction in the labor force, including people staying out of the workforce (supported by their spouse for example), going to school and living on student loans, participating in "unreported employment", as well as workers going on disability (legitimately or not).

Going forward this ratio will be critical to watch because it will indicate whether people of working age are entering or leaving the official labor force. For now though the headline unemployment rate number is not meaningful and should not be used as a gauge of improving labor conditions.

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