February 4, 2015

The ‘Big Lie’ and Other Truths about Unemployment

SMITH BRAIN TRUST -- In a column posted today, Gallup Chairman and CEO Jim Clifton decries the celebration over the U.S. unemployment rate, which has dropped to 5.6 percent. He says the Department of Labor figure “amounts to a Big Lie.” William Longbrake, Executive-in-Residence at the Center for Financial Policy at the University of Maryland’s Robert H. Smith School of Business, presents a more mixed assessment in his January 2015 Longbrake Letter.

More full-time jobs: Despite the accounting tricks, which Clifton lays bare in his column, Longbrake sees evidence of authentic growth in the U.S. labor market. One key figure is total hours worked, which combines full-time and part-time production. “The length of the workweek rose for all workers, and for production and nonsupervisory workers,” Longbrake says. “Total hours worked by production and nonsupervisory workers rose 3.56 percent during 2014, due primarily to a larger proportion of full-time jobs.”

Not all rosy: Although employment growth was strong in 2014, Longbrake says the rosy picture is not corroborated by other labor market measures. “First of all, the conventional unemployment rate, which the Bureau of Labor Statistics refers to as the U-3 measure, is nearing the level that generally prevails when the economy is buoyant,” he says. “But the broader U-6 measure of unemployment, which includes those who are working part-time for economic reasons and those marginally attached to the labor force, is still well above the 8 percent to 9 percent range that historically has prevailed when economic activity is strong.” He says the U-6 unemployment rate, which dropped to 11.20 percent in December 2014,is improving more slowly than would be expected based on the recent improvement in the U3 rate.

Long-term unemployment: Longbrake says another labor market indicator that still registers weakness is the long-term unemployment rate, defined as the percentage of the labor force that has been unemployed for 26 weeks or longer. “When the short-term unemployment rate -- those unemployed less than 26 weeks -- averaged 3.8 percent in 2006 and 2007 just prior to the onset of the Great Recession, the long-term unemployment rate averaged 0.8 percent,” he says. “In December 2014 the short-term unemployment rate was 3.8 percent, identical to the pre-Great Recession average, but the long term unemployment rate was 1.8 percent.” He says this metric is improving rapidly but still has a ways to go to equal the pre-Great Recession average.

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The Robert H. Smith School of Business is an internationally recognized leader in management education and research. One of 12 colleges and schools at the University of Maryland, College Park, the Smith School offers undergraduate, full-time and flex MBA, executive MBA, online MBA, business master’s, PhD and executive education programs, as well as outreach services to the corporate community. The school offers its degree, custom and certification programs in learning locations in North America and Asia.

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