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What Is The Real Unemployment Rate?

This is In Real Terms, a column analyzing the week in economic news. We’re still experimenting with the format, so tell us what you think. Email me or drop a note in the comments. And thank you for all the great feedback so far!


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A couple of weeks back, I had a bit of fun with Donald Trump’s claim that the “real” unemployment rate is as high as 42 percent. That number is absurd — it would require counting everyone who isn’t working, including retirees, students and the disabled, as “unemployed.” But whether or not he realized it, Trump was touching on a serious debate in economics right now: Is the unemployment rate, now at 4.9 percent, an accurate reflection of the health of the economy?

A new report from the White House this week argued that it is, or at least close to it. In the annual Economic Report of the President, released Monday, President Obama’s top economic advisers said that the people who gave up looking for work during the recession have by now largely returned to the labor force. And while Trump and his supporters may not give much credence to a White House report, my own dive into the numbers finds that the true unemployment rate has fallen significantly over the past two years and is now under 6 percent.

A quick refresher on how the unemployment rate works: The government only counts people as “unemployed” if they are actively looking for work. Everyone else who isn’t working is considered out of the labor force entirely. Ordinarily, that makes sense: People who are retired or who choose to stay home to raise a family aren’t unemployed; they’re just choosing not to work. But the recession messed with the formula: The economy was so bad for so long that millions of jobless workers simply gave up looking for a job, meaning they no longer counted as unemployed. The unemployment rate topped out at 10 percent during the recession, but it would have been higher — possibly a lot higher — if those so-called “discouraged workers” had been included.

The economy has improved a lot over the past six years, though, and economists don’t agree about how many people are still stuck on the sidelines of the labor force. Officially, there are about 600,000 discouraged workers (roughly 300,000 more than when the recession began), but the government’s definition is pretty narrow. It doesn’t count people who don’t consider themselves discouraged but who might come back to the labor force if there were opportunities available. Imagine a stay-at-home parent who would like a job, but only if it paid enough to cover child care, or a 60-year-old who calls himself “retired” but would really rather be working.

How many of those people are there? It’s hard to know for sure. The “labor force participation rate” — the share of adults who are either working or actively looking for work — is near a three-decade low, which might seem to suggest that there are lots of people waiting to return to the job market. But a big part of that decline is due to the retirement of the baby boom generation. And even controlling for the aging population, labor participation was falling long before the recession, for reasons that are only partly understood.

The White House, in its report, estimates that the combination of demographics (“aging trends” in the chart below) and other long-term trends (“residual”) together account for the vast majority of the decline in labor force participation since 2009. Only the small sliver in the middle of the chart is due to the state of the economy. In the Obama administration’s estimation, there are about half a million Americans who should be in the labor force but aren’t. If they were counted as unemployed, the jobless rate would be about 5.2 percent, only a few ticks higher than the official rate.

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The White House, of course, has an incentive to make the economy look as good as possible. So as a check on their number, I built my own simple model (an updated version of the one I used in this story a few years ago) to estimate how many people are still missing from the official unemployment rate. (I’ll put the details in a footnote,1 but essentially I just assumed that prerecession trends held steady.) My model estimates there are as many as 1.5 million people who should be included in the unemployment rate. That’s triple the White House’s estimate, but it still implies the “real” unemployment rate is down to 5.8 percent.

The difference between 4.9 percent and 5.8 percent is small but significant. Many economists consider 5 percent to be a rough long-term floor for the unemployment rate (other economists think the floor is lower); unemployment can’t drop much below that threshold without triggering inflation. But if there are really hundreds of thousands or even millions of willing workers just waiting to get back into the labor market, that means there is room for job growth to continue without driving up inflation. The participation rate has edged up in recent months, suggesting that the stronger economy is drawing workers off the sidelines. Next week’s jobs report will give the latest sign of whether that trend is continuing.

Age of debt

Researchers at the New York Fed this week published an interesting look at the changing patterns of how people borrow money at different points in their lives. The researchers focused on the rising debt loads of older Americans, whose borrowing increased 60 percent from 2003 to 2015. But equally interesting are major changes in borrowing behavior at the other end of the age spectrum.

According to the Fed data, there’s been little change in the amount of debt held by borrowers under 30 over the past 12 years. But the makeup of that debt has shifted dramatically. Back in 2003, the average 25-year-old had a bit more than $5,000 in student debt. Today, that number tops $11,000. Meanwhile, other kinds of debt — auto loans, mortgages, credit card balances — have fallen.

On the one hand, it’s good news that even as student debt has skyrocketed, young people have managed to avoid falling deeper into debt overall. That suggests millennials’ finances may be more stable than they are often portrayed. But debt isn’t always a bad thing. Falling credit card balances are a positive trend, but the decline in mortgages and auto loans indicates that — whether because of student debt, limited job prospects, tighter lending standards or other factors — many young people are still struggling to get a financial foothold in adulthood.

The bottom for the barrel?

Pretty much everyone who’s anyone in the oil world was in Houston this week for CERA Week, an annual conference hosted by author, industry consultant and living embodiment of the conventional wisdom on energy, Daniel Yergin. Just a few years ago, the conference was a celebration of the ingenuity of the U.S. oil companies that had figured out how to unlock crude trapped in shale rock. This year, with oil prices at around $30 a barrel, the tone was decidedly grimmer. Saudi Oil Minister Ali Al-Naimi kicked off the conference on Tuesday by ruling out cutbacks in production, which sent the price of oil tumbling anew; That same day, the International Energy Agency said it could be years before prices rebound.

But perhaps a bottom to the oil market is closer than many experts think. Also on Tuesday, a company called Silver Run Acquisition Corp. announced it had raised $450 million from investors to buy up oil and gas assets. What makes the deal particularly significant is that Silver Run is led by Mark Papa, widely considered one of the savviest executives in the business. (His former company, EOG Resources, was one of the earliest shale companies to shift its attention from natural gas to oil, which was much more lucrative at the time.) Papa’s decision to jump back into the game doesn’t necessarily mean he expects prices to shoot back up again, but it suggests he thinks they don’t have much further to fall, either.

Number of the week

At the end of the day on Wednesday, the British pound was worth $1.39, the first time the pound has closed below $1.40 since the 1980s. Just last summer it was worth $1.70.

The pound is falling in value because of fears of a “Brexit” — a decision by Britain to leave the European Union. Over the weekend, the British government announced it would hold a long-promised referendum on EU membership on June 23. Polls have generally shown the “in” camp with a modest lead over the pro-exit side, but the gap is narrowing — and in any case, polling has been unreliable in recent British elections.

Most (though not all) economists think leaving the EU would be somewhere between “bad” and “disastrous” for the U.K. economy. But the plunging pound is good news for any Americans planning a trip to London this summer.

Elsewhere

Annie Lowrey argues that it’s once again time to “end welfare as we know it” — this time by bringing it back.

Susan Dynarski says it’s time to help low-income and first-generation students not only attend college but actually graduate.

What happened when Japan instituted negative interest rates? Savers started buying up safes to hold their cash, report Jun Hongo and Miho Inada.

CORRECTION (Feb. 26, 11:34 a.m): An earlier version of this article misstated the average amount of debt held by 25-year-olds in 2003 and today. It was $5,000 in 2003, not $20,000 and it is $11,000 today, not $50,000.

Footnotes

  1. My model attempts to account for both demographic changes and long-term labor force trends within each demographic group. Using Current Population Survey microdata, I calculated participation rates by sex and single year of age — 16-year-old males, 16-year-old females, 17-year-old males, and so on — for the years 2000 through 2007. I then calculated a linear trend for each demographic group and projected that trend forward to 2015. That produced an estimate of what each demographic group’s participation rate would have been in 2015 if past trends had continued and the recession had never happened. Finally, I applied those participation rates to the January 2016 population numbers and calculated the total participation rate. I estimate that based on demographic trends alone, the participation rate should be 63.9 percent; accounting for both demographics and other prerecession trends, the participation rate should be 63.3 percent, versus the actual January figure of 62.7 percent. ^

Ben Casselman is a senior editor and the chief economics writer for FiveThirtyEight.

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