Unemployment in the Eleventh Hour: Labor Statistics and Election 2012

by Alex Engler

“I expect we’re either going to see a bit of an acceleration of payroll jobs, or we’re going to see the unemployment rate go back up.”

That is former Bureau of Labor Statistics (BLS) Commissioner Keith Hall, who would not be surprised to see a rise in the unemployment rate resulting from the upcoming BLS October Employment Report. Normally a small increase in the unemployment rate, which has wavered between 8.1 and 8.3 percent for most of this year, would not be of any substantial notice.

This report, however, is uniquely situated as the last foreseeable event that can substantially influence the presidential election. Despite Hurricane Sandy, it will be released in two days, on Friday, November 2. And a rise in unemployment?

“It’s quite possible,” Hall said.

Dr. Hall, now a Senior Research Fellow at the George Mason University-based Mercatus Center, suggests that this key economic indicator is particularly likely to rise in part because of the unusual results of the previous two months of jobs numbers. During August and September the unemployment rate dropped dramatically, from 8.3 percent to 7.8 percent, based on an estimated increase of 873,000 jobs. However, this data is based on the BLS’s household survey, which is just one of the two major monthly studies BLS conducts each month.

According to Hall, this might not be the full story.

“There’s lots of reasons to think that the economy probably did not improve that much… that [September] report gave you conflicting signals on the labor market for one month.”

Dr. Hall is referring to the disparity between the household survey and the other major monthly survey run by BLS, the payroll survey, which indicated a far more modest 114,000 jobs gained in September. When accounting for the August gains, and the upward revisions of July’s estimate, the payroll survey only estimates 296,000 jobs gained, just over one third of the total estimated by the household survey. Since the household survey’s unemployment rate is calculated from a monthly survey of around 60,000 households, it tends to be more volatile than the payroll jobs numbers, which collects data from 140,000 private businesses and government agencies.

Although Dr. Hall is quick to note that other factors—like a shrinking labor supply or strong economic growth—could keep the unemployment rate down, he is not alone in his prediction. A Reuters survey of economists portend similar results, showing an expectation that unemployment will rise to 7.9 percent.

There is no evidence to suggest that an uptick in this measurement of unemployment will do substantial harm to Obama’s reelection chances, but certainly it is not ideal for the Obama campaign.

While in this scenario the unemployment rate may prove mildly unpleasant to the president, over the past four years the unemployment rate has done the Obama administration its fair share of favors.

The unemployment rate has slowly declined from its high of 10 percent in October of 2009, which gives the impression that the employment situation is on the mend. The economic recovery following the Great Recession has been the weakest in modern history in terms of GDP growth, averaging 2.2 percent annually. Still, the economy has created 4.25 million jobs since the bleeding stopped in March of 2010, and with the unemployment rate finally under eight percent, it is tempting to drop the “jobless recovery” talk.

Keith Hall again: “The unemployment rate appears to be saying that the labor market is improving, but it’s not.”

Dr. Hall has a particularly grim view of the domestic labor market and no shortage of statistics to back up that assertion. He argues that “the unemployment rate… should not have come down from 10 percent, it should be somewhere over 10 percent.” Hall feels that the unemployment rate—for all the attention it gets—is a flawed metric because “during a recession, what happens with the unemployment rate is that [labor] participation drops.” In other words, as individuals stop seeking work (as some six million people have) they drop out of the labor force and no longer count toward the unemployment rate, ultimately reducing the jobless statistics. This is not a secret, but the degree to which it has affected the jobs numbers is truly startling.

When the labor market completely bottomed out in November of 2009, 58.2 percent of working age citizens were employed. As recently as August, 32 months later, that ratio was 58.3 percent. The employment-population ratio, as this metric is known, has historically been closer to 62 or 63 percent. This portrays a labor market that has not recovered at all from the depth of the recession. It also illustrates how the conventional focus on unemployment rate over employment ratio has been a blessing for the Obama administration.

Some, including Paul Krugman, argue that this drop is in part due to demographic shifts, but there is no question that the employment-population ratio presents a sobering depiction of the labor markets.

So how can this be reconciled with the creation of 4.25 million new jobs? Hall posits that they were encompassed by population growth.

“Our working age population, by my calculation, has like ten-and-a-half million more people since [2008].”

When asked how the labor markets got into such a deep hole, Hall specifically cites the dramatic wealth effect resulting from the Great Recession. According to Dr. Hall’s figures, not only did the national economy lose out on $3.7 trillion in gross national income due to the shock to GDP growth from the recession, but Americans lost another $8 trillion in homeowner equity. These numbers, in addition to the growth of government debt and financial losses, leads Dr. Hall to estimate the total cost of the recession at a staggering $23 trillion dollars.

Other attempts to quantify the economic damage have shown similarly disastrous losses. For instance, the Federal Reserve estimated that the net worth of the median family lost dropped by 39 percent from 2007 to 2010.

Hall went on to posit that it was this severe loss of wealth that has been one of the main factors holding the economy, and especially consumption, down.

“Once you mess with people’s perceptions of their wealth, it’s going to take a while to work that out.”

This article is based on an interview with Dr. Keith Hall conducted on October 22, 2012 at George Mason University.