When I watched the evening news last night, a mention was made of the drop in the unemployment rate but a drop in average earnings as well. Given it was the evening news, no analysis was done so we shall do some of that here. As I mentioned in the recent post on the minutes of the December Federal Reserve meeting, there is concern that a continued drop in the unemployment rate could lead to a large rise in wage inflation. The result from yesterday’s announcement from the Bureau of Labor Statistics seems to contradict that concern. Looking inside the numbers will show us why this isn’t a contradiction.
The Federal Reserve has been criticized for focusing on the unemployment number as one of its targets on when to normalize targeted interest rates. I have agreed with that criticism. It shouldn’t be the unemployment number that is followed. Instead I think the participation rate should be followed. For December that number fell from 62.8% to 62.5%. This matches the low seen in January 2014 which was the lowest rate in eleven years. As an indicator, average earnings should be decreasing in that situation.
If you want to consider the unemployment rate, I find it more useful to use the maximum participation rate as a factor. This has the benefit of including the unemployed who are discouraged and not looking for work. That unemployment rate increased from 11.4% to 11.8%. Since the unemployment rate only includes those who are looking for work, it misses all of those in the labor force who have stopped looking. That number increased in December.
The participation rate for men 16 years of age and over slightly decreased from 68.9% to 68.8%. The participation rate for women 16 years of age and over decreased from 57.1% to 56.5%.
The participation rate for people between 16 years and 24 years of age decreased from 54.5% to 53.5%. For men, that rate changed from 55.2% to 55.0%. For women, it significantly changed from 53.7% to 52.1%.
For men 65 years of age and over, the participation rate increased from 22.8% to 23.0%. For women 65 years of age and over, the rate stayed constant at 15.1%.
The conclusions are simple:
- women dropped off payrolls disproportionately more than men
- the young also dropped off payrolls disproportionately more than older people
- young women saw a remarkable decrease in their participation rate
While the government may be celebrating the number of consecutive months with greater than 200,000 new jobs, the number of unemployed visible and invisible continue to rise.