The Irrelevant Unemployment Rate

May 16, 2014

The unemployment rate has become an inaccurate way to measure the health of the labor market, contends Nicholas Eberstadt of the American Enterprise Institute.

One hundred years ago, the unemployment rate made sense. Women were a very small portion of the U.S. workforce (just 20 percent in 1920), and nearly all able-bodied men were in the labor market, either working or looking for work. There was no real "safety net," and being out of a job meant destitution for a person and his family.

While the U.S. still uses that same unemployment rate, Eberstadt explains, the labor market of today is vastly different. Not only is 47 percent of the labor force now female, but being out of work -- while it can be a hardship -- does not cause devastation, shame, or financial ruin. Unlike a century ago, there are plenty of alternatives to work today, as government support programs have made voluntary joblessness a feasible option.

Significantly, the U.S. has seen a major shift in the relationship between the work rate and the unemployment rate. No longer does a drop in the unemployment rate mean that the labor market is in recovery, because the rate does not take into account the number of Americans who have simply stopped looking for work.

  • In the 1970s and 1980s, the unemployment rate and the work rate had a clear, inverse relationship. When unemployment rates were high, work rates were low, and vice versa.
  • But this is not the case today. Looking at the unemployment and work rates from 1999 to the present, there has been a complete disconnect between the two rates since 2008. While employment has gradually improved since 2010, the work rate has remained flat. In short, the unemployment rate is no longer indicative of the U.S. work rate.

Eberstadt explains that there are now three, not two, employment statuses in America: employed, unemployed, and those who choose not to look for work -- the "flight from work" group. This trend is most evident among men:

  • In the early postwar era, a 6 percent unemployment rate among males ages 25 to 54 meant that 8 percent were not working. Today, a 6 percent unemployment rate means that 18 percent of working age men are not working.
  • For every unemployed man today who is looking for work, there are two unemployed men who are not looking for work.

With increasingly large numbers of Americans giving up on work, using the traditional unemployment rate is no indicator of the health of the U.S. labor market.

Source: Nicholas Eberstadt, "America's Increasingly Irrelevant 'Unemployment Rate'" Real Clear Markets, May 14, 2014. 

 

Browse more articles on Economic Issues