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February 2004

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Hidden Unemployment

By Site Administrator
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February 2004
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T hat delicious smell? It’s the Economy Cooking”—this is Business Week (December 8, 2003) greeting the news that the gross domestic product expanded at an annual rate of 8.2 percent in the third quarter of 2003. Looks as though we’re back in business as the world’s mightiest engine of progress and prosperity. 

How about employment—smelling delicious, too? The latest recession, as officially dated by the National Bureau of Economic Research, began in March 2001 and ended in November 2001, but the aroma lingers on. From March 2001 through July 2003, 2.7 million jobs disappeared, in the greatest employment contraction since the 1930s: for the first time since World War II, the total number of employees on payrolls (private sector and government) continued to fall 20 months into recovery from a recession. The previous record, impressive in its own right, was 13 months, following the end of the 1990-1991 recession. 

From August through November 2003, to the accompaniment of cheers for “the end of the jobless recovery,” the economy generated an average of 82,000 new jobs per month. But this is half the number needed to absorb all the new people looking for work and hold the unemployment rate steady, and one-third the number needed to bring about substantial reductions in the ranks of the unemployed (8.7 million in November 2003). 

The official unemployment rate (which was 4.3 percent in March 2001) peaked at 6.4 percent in June 2003, then fell to 5.9 percent in November 2003, essentially unchanged from October. Thereby hangs the tale of the labor market facing U.S. workers—provided that the full story is told. 

The official rate is the percentage of all workers who are unemployed, expressed as unemploy- ment/labor force. The numerator, unemployment, is the number of jobless people who have actively looked for work during the last four weeks. The denominator is the number of people in the labor force, which equals employment plus unemployment, or people who have jobs plus those who are unemployed as defined in the numerator. 

This measure understates unemployment in two key respects. First, unemployment excludes involuntary part-timers—people who want full-time work but have to settle for part-time or split-week schedules. Second, it excludes “discouraged workers”—those who believe they can no longer find work and stop looking or who indicate they want a job and have looked for work sometime in the indefinite recent past. People in this category are no longer actively seeking work and are therefore classified as “not in the labor force” (neither employed nor unemployed). 

Thus, as happened last summer, an increase in numbers of discouraged workers can actually reduce the official unemployment rate. The labor force as officially defined (employed plus unemployed) totaled 147,096,000 in June and 146,530,000 in August—a decrease of 566,000, during which time the official unemployment rate fell from 6.4 to 6.1 percent. The reason for the drop is that 566,000 workers vanished (ceased looking for work and were no longer considered to be in the labor force). 

For this and other reasons, the U.S. Bureau of Labor Statistics (BLS) provides a series of “alternative unemployment measures,” which go almost entirely ignored and unreported by the major media and news organizations. One of the alternative measures shows that if both involuntary part-timers and discouraged workers were added to the unemployment rate as officially measured, the rate for November 2003 would stand at 9.5 percent of the labor force, instead of the official 5.9 percent.

Since the 1970s, labor force withdrawal and longer jobless spells have been gaining ground, steadily and ominously, so that even the BLS “alternative unemployment measures,” let alone the official one, increasingly understate true unemployment in the U.S. 

Jobless rates fell sharply in the 1990s because more prime-age males (25 to 54 years old) stopped looking for work and thus were not counted as unemployed and gave reasons other than job-search discouragement for their withdrawal from the labor force (personal reasons, keeping house, early retirement, disability, self-employment). “Over the 1990s, even as unemployment was falling, time spent out of the labor force was rising... [and] was so large that total joblessness—which combines the unemployed with those who have withdrawn from the labor force—was as high at the business cycle peak in 2000 as it had been at the previous cyclical peak of 1989, even though the [official] unemployment rate was roughly 2 percentage points lower. In terms of total joblessness, the often-praised boom of the 1990s really represented little in the way of employment progress for American males” (C. Juhn, K. Murphy, and R. Topel, “Current Unemployment, Historically Con- templated,” Brookings Papers on Economic Activity, 1:2002). 

Participation in the labor force by prime working-age males, who still command the highest wages for any given job, has been drifting downward for more than 40 years. In 1972 a noted labor economist regarded the labor force drop-out by males, both black and white, as “mysterious.” Three-fifths of it, he observed, could be attributed to growth in numbers of men “unable to work...reasons for this apparent increase in chronic disability are not known” (T.A. Finegan, “Labor Force Growth and the Return to Full Employment,” Monthly Labor Review, February 1972). It is all the more “mysterious” in that it flies in the face of the increasing demand for jobs—and take-home pay—that has made the U.S. the only high-income nation in which time spent working has been on the rise since 1970. The average U.S. worker now spends more time on the job than she or he did in 1950. 

Male participation in the labor force, it would appear, has been declining not as a result of genuine physical or mental illness, or free choice of more leisure instead of work, but because of chronic job scarcity and lack of decent employment opportunities, particularly in an era of wage compression at home and shifting of factory jobs to lower-cost nations overseas. 

This is the state of the labor market in which the number of workers receiving disability benefits grew from 1.5 million in 1970 to 5.0 million in 2000, more than twice as fast as the labor force during those years. (The increases were 4.1 percent per year and 1.8 percent respectively.) When Congress began to loosen the standards for disability payments in the late 1980s, many people who normally might have been counted as unemployed started moving into the disability system in record numbers. Nearly all the increase came from hard-to-verify disabilities, like back pain and mental disorders. From 1990 through 2002, the disabled worker total climbed at 5.2 percent per year, while the labor force increased only 1.0 percent per year. 

Another sign of “hidden unemployment” is the rapid expansion in numbers of people who declare themselves “self-employed”—9.2 million by November 2003, accounting for 6.6 percent of all people who say they are working and are officially counted as employed. Some of them—perhaps many—are out of work but will not admit it to the Household Survey enumerator who collects the employment data each month. Self-employed workers increased by 156,000 in November; this was a primary reason why the official unemployment rate dropped from 6.0 percent in Oct- ober to 5.9 percent in November. 

Incarceration is another comparatively large source of hidden unemployment in this country. In 2002, the number of people im- prisoned reached 2.0 million. We’re number one. The U.S. has 702 prisoners per 100,000 of population, well ahead of second-place Russia (665 per 100,000); the U.S. rate is three times higher than that of Iran, four times that of Poland, five times that of Tanzania, seven times Germany’s. Adding jailed working-age men to the official U.S. unemployment rate would increase it by as much as 0.3 percent. 

In a historical survey of unemployment, Wall Street Journal columnist Cynthia Crossen wrote (Dec. 3, 2003) that “Since the late 19th century, America has never been fully employed except during the two world wars.” In fact the record shows that unemployment may never have been as low as 2 to 3 percent, which would represent genuine full employment, except near the end of World War II (Du Boff, “Unemployment in the United States,” Monthly Review , November 1977). Not even the three longest economic expansions in our history—those of the 1960s, 1980s, and 1990s—have been able to drive the U.S. economy to full employment. In the new era of globalized technologies and production, jobs are becoming even harder to get and hang on to.  

Richard DuBoff is an author and professor of economics at Bryn Mawr College.

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