H. Nejat Seyhun, contributing writer to The BusinessThinker magazine, is the Jerome B. & Eilene M. York Professor of Business Administration and professor of finance, Ross School of Business, University of Michigan. He is an internationally recognized authority on financial issues and Derivatives.
The Bureau of Labor Statistics announced last Friday that on a seasonally adjusted basis, total private employment increased by 154,000 while the overall total nonfarm employment increased by 117,000 in July (expectations were for an increase of 75,000). Similarly, the overall unemployment rate went down to 9.1% from 9.2%. Expectations were for no change from June. Since both figures were better than expected, the stock market increased by about 150 points inreaction prior to the opening bell.
On closer inspection, however, there is a lot not to like in the August report. First, the civilian non-institutional population increased by 182,000 from June to July, while the overall number of employed actually went down by 38,000. Since the overall working-age population growth has been about 1.8 million over the past year, the economy on average needs to add about 140,000 new jobs to prevent the unemployment rate from increasing. The net additional payroll figure of 117,000 increase is certainly not satisfactory from this perspective.
Second, the decline in unemployment rate is really not driven by the payroll increase. Instead, it is driven by discouraged workers leaving the workforce. In addition to the decline in the total employed, the labor participation rate also declined from 64.1% in June to 63.9% in July. Even with the additional payroll, had labor participation rate held steady from June to July, the unemployment rate would have actually increased to 9.3%.
Third, there are additional dynamics in the labor picture that are discouraging. For instance, over the past year, total labor force has increased by about 318,000. When we look at part-time and full-time groups, we see that full-time labor force has actually declined by 143,000 while the part-time workers have increased by 460,000. Hence, the net increase in total employment is driven by part-time jobs. Increasingly, workers are leaving full-time jobs and taking on part-time jobs.
Fourth, the labor participation rate has been falling steadily, masking the true state of the deteriorating labor situation. Over the past year, about 2.2 million actually people left the workforce due to discouragement. Only a year ago, the labor participation rate was 65.3%. Had this rate held steady over the past year, the current unemployment rate would be announced as nothing less than a whopping 11.0% in July 2011.
Overall, after more than two years into a so-called recovery and trillions of dollar spent in fiscal and monetary stimulus, there is no evidence of recovery in the employment picture. I find this discouraging.
About the author
H. Nejat Seyhun is Professor of Finance and Jerome B. and Eilene M. York Professor of Business Administration at the Ross School of Business, University of Michigan, where he has twice served as the chairman of the finance department. He holds a Ph.D. in finance (1984) from University of Rochester, Rochester NY. Professor Seyhun is an internationally recognized authority on financial issues and Derivatives. His research has been quoted frequently in the financial press including the Wall Street Journal, New York Times, Washington Post, Newsweek, Business Week, Bloomberg Business News, and Los Angeles Times. Among his past consulting clients are Citigroup, Towneley Capital, Tweedy, Browne, and Vanguard.