Economombo 4: Participation Rate Drops

Back in Economombo 3, I wrote about how the economy with respect to our company had turned out better than expected. It’s true again. [1] Employment in the manufacturing sector is as high as it has ever been, since 2009. During the great drop-off of the Great Recession, manufacturing employment plummeted from over 14 million workers in the US, to its current roughly 12 million.

The “slightly-less-than-great” recovery in manufacturing is a very gently upward trend, amounting to around 10 thousand jobs added in a month. Last month was better than most because about 20 thousand jobs were added. This is good news for my company. And, if you listen to the pundits, good for the country.

The reason this article doesn’t take the experts seriously is because there is other information that screams out exactly the opposite. On the one hand we see that jobs are being added in manufacturing. But on the other hand, well, take a look at this. [2]

This is a graph showing how many people in the USA are participating in the work force. This is a real number. We get it by adding up all the people who are working in the US [3] and dividing it by the total number of people living in the USA [4]. This gives us a percentage.

Of course we can’t have a 100% participation rate, because that would mean everyone is working at an official job. This includes really old people, sick people, babies, and people who flat-out don’t want to work. At the same time, we can’t have 0% either, because someone has to pay taxes to get our government moving.

Best of all, this number shouldn’t move much. During the best of times, when everyone is happy and our society is stable, the number should pretty much stay within a narrow range. During the 1950s and most of the 1960s, the range was firmly in the 57 to 60% area. During the time when many women started exercising their right to enter the workforce, the participation rate grew to a high of 65 to 68% for the 1990s to 2008, almost 20 years. Then came the Great Recession.

Participation dropped, fast. And it’s this number that means something to all of us. It tells us how many people are officially working to support our government and keep our economy rolling along. From a high of 66 in 2008, we now stand at just under 63. In fact, we lost half a percent in the last month alone.

Putting this into perspective means that we have to look at the numbers. If one percent of the USA population is 3 and a half million people, then losing participation of 5 percent means that 5 times 3.5 gives us over 17 million people left the workforce. Seventeen million! In the last month alone, the fact that a half percent left the workforce means that 1 million 700 thousand people are gone.

The government claims that unemployment numbers show this, but they don’t. Look at the fact that unemployment supposedly went up only 0.1% from last month to this. The reason they can claim this is because the unemployment number takes into account people who leave the workforce – they don’t get counted. But that’s my point – we HAVE to count them! They are still people who were working, and now they aren’t!

Now that this rant is almost over, let’s ask a better question. Does it matter that the participation rate is dropping? Perhaps not. It was just over 55% over 50 years ago. So we know that it could drop another 5% without hurting our economy too much. We simply don’t know, because we haven’t been paying attention to the right information all this time.

There is one thing that we can know for sure. The changing participation rate indicates that our society is changing, and that includes the economy. Perhaps all those workers are being replaced by robots or computers. Or perhaps their jobs are being sent overseas. It doesn’t really matter. What matters is that those people had taxable jobs, and now they don’t. Society is changing, and we don’t know enough to know how.

What are your thoughts?

 

[1] Type in bit.ly/MfgEmp, or try the direct link: http://data.bls.gov/timeseries/CES3000000001?data_tool=XGtable

[2] bls participation rate

[3] It’s not good enough to be working, like raising a family or baby-sitting, but you also have to be officially reported to the government through paying taxes and surveys that the company fills out.

[4] This can get complicated, because it may include people who are ‘illegal’ as well as legal. Because the number of illegal people is so small, relative to legal people, we can ignore the number. In fact, to make this easier on ourselves, we can simply assume that the total number of people in the USA has been 350 million for the past 5 years.

 

Economombo 3

The last Economombo article reflected on the inadequacies of economists. Certainly, they have gotten quite enough wrong. However, the last statements about how business seemed to be taking a turn for the worse have, in fact, turned out otherwise. Our business has gotten better, and the general outlook has turned positive.

It takes a big man to admit when he’s wrong, and I’m not that big. Taking disparate data and forging a prediction from it is fairly ambiguous at best, and flat out random at worst. I won’t be happy until all our economist friends publish all their predictions in historical format, and line them up with what actually happened. That is, if they can agree on what actually happened.

Which brings us to the heart of today’s article. Counting. Simply counting. Sounds easy enough, because it’s something you’ve been doing before you can remember. How many fingers? How many toes? There’s a good chance you’ve been counting since kindergarten, and for you math whizzes out there, you may have been counting since you were three. Maybe four.

Here’s two examples of things that look like numbers, but really don’t count anything. The first is the stock market indicators, like the Dow Industrial Average (DIA), or the S&P index. Both are mentioned by news sources throughout the day. Both are something that you might pay attention to occassionally, especially if you have money in the market. But these aren’t numbers – they don’t count anything.

Back in the mists of time, the market indicators started as a simple count of what the stocks were trading. You took their price, added all the stocks that you were interested, and there was your number. Today there are thirty stocks in the DIA. But they don’t simply get added together. As time went by, some of the stocks split. Some companies dropped out of the average, others were put in their place. Not all the values were the same. So what the DIA managers do is multiply every stock by some special number, a ‘weight.’ This weight adjusts the overall numbers so that they supposedly reflect the economy, and don’t change so much every time the DIA basket of stocks is adjusted.

The fundamental fact is that the DIA is a made up number! It doesn’t count anything! You can’t compare the DIA to anything else in the universe and have it make sense! Go ahead and try.

The second example is that of unemployment. An economist may have countered our first example by saying that the DIA is not an accepted economic measure. A much harder number for them to argue against is unemployment. Many many economists use unemployment in their predictions, in fact trying to predict it as well on a regular basis.

The problem with unemployment is that it’s an interpreted number. Interpreted, you say? Yes, interpreted. There is no direct number called unemployment. The way the experts get to a final number, say this month’s 7.6%, is by contacting so many households every month. They ask these households a number of questions. Central to these questions is this; are there household members looking for work, that don’t have a job? If the answer is yes, then they are unemployed!

The bad news is that, just perhaps, that person no longer looks for work because they haven’t worked in a year. Or, perhaps, that person is looking for work, but still also works two other jobs. In any case, there are a number of other factors that have to be taken into account to count someone as unemployed. But wait, there’s more!

We’ve counted people who are unemployed, but what about those that are employed. Turns out that you can use the same households to figure that out, in combination with all the numbers reported by employers throughout the country. Every month, employers get survey questions that they have to fill out. All these numbers, then, are mashed together, or interpreted, so that we come out with a certain number of people who are employed.

Again, like before, there’s some bad news. The number reported by employers can be a bit old. There may be people who are employed by the company that are also working another job. It could be that the employer is slightly under-reporting their numbers so that the government doesn’t come looking too closely. And it may be that things have changed since the employer reported the numbers to when someone at a government desk gets around to reading their survey.

The final interpretation is this. Take the number of people in the household survey and figure out a percentage, and a range of accuracy. That’s statistics. Then take all the people who are working, compare the survey number to what employers report, and make an adjustment. Then take the first percentage and adjust it so that its denomenator matches the numbers of total employed. THEN adjust the whole thing based on any seasonal or other cycles there may be in the time series. That is what I call an interpreted number.

Again, there is no simple item that we can point to and say that this number, unemployment, is counting accurately. It’s impossible because unemployment is an interpreted number. What can we do to improve the situation?

We can count. We can count something that really exists. Something that exists, and doesn’t vary whether or not someone decides to keep looking for work, and doesn’t vary if someone works a ½ job, or 3 jobs. We call this number participation. It counts the actual number of people who work. And if you combine this number with the number of people who can work, everyone between the ages of 18 and 65, for example, you get a very stable number that we call the participation rate.

So, remember, when you hear the stock market report, or hear an unemployment number, don’t fret. It’s meaningless. Take a look at the participation rate instead. [1] And draw your own conclusions.

[1] This link should take you to the US Department of Labor’s Bureau of Labor Statistics. They do a great job of collecting and reporting all the numbers. Now, if they could only tame those economents. http://data.bls.gov/timeseries/LNS11300000