Oregon Office of Economic Analysis

This post is something our office has been working on for the upcoming quarterly economic and revenue forecast release next week, however coming on the heels of this morning’s great U.S. employment report, we thought the timing was right to post today.

One of the themes that permeate discussions surrounding both the Oregon and U.S. economies is that the decline in the unemployment rate isn’t “real”. Our lower unemployment rate isn’t so much due to improving labor market conditions, but rather due to people giving up looking for work who are no longer counted among the unemployed.

Media outlets have no trouble finding misinformed analysts to back up this claim after each monthly employment report is released. Many even say improvement is due to a shrinking labor force. It takes only a cursory look at the survey data to debunk these claims, despite how widespread they have become. No doubt, the number of workers who have given up looking for work is disturbingly high, which is putting downward pressure on the unemployment rate. Nevertheless, the vast majority of improvement can be traced to an increase in job opportunities. Moreover, Oregon’s labor force is still growing even after discouraged workers are accounted for.

As shown in the slides above and below, using detailed labor force data, we are able to dissect the decline in the unemployment rate and figure out its composition. The first slide shows calculations based on isolating each change, ceteris paribus (econ jargon for leaving all other things equal), and seeing what each change does to the unemployment rate. Green arrows refer to actions that are generally considered good (more employment, less unemployment, more individuals looking for work) while red arrows are for actions generally considered bad (more individuals giving up looking for work.) Even though the increase in the number of persons who have Given Up Looking lowers the unemployment rate, this is not a good indicator of the economy’s health. Conversely, although increasing the labor force raises the unemployment rate (all else being equal) it is generally a good indicator that more individuals would like work. Note that the “Given Up Looking” category is technically “Marginally Attached Workers” according to the BLS, while the “Started Looking” category is the change in the labor force.

Over the past two and a half years, the number of employed Oregonians has increased a little more than 60,000, while the number of unemployed has declined by nearly 53,000. The fact that the decline in unemployed has been matched by an even bigger increase in the number of employed is very encouraging and clearly the largest reason for the declining unemployment rate. The labor force overall is not declining in Oregon. Yes, there was a large increase in the labor force at the beginning of the recession followed by a decline in 2009. However, since then, the labor force has continued to grow and is essentially at an all time high today. The difference between the red and light blue lines is due to the number of Marginally Attached Workers which are persons who have looked for work within the past year but have not looked for work within the past 4 weeks and are therefore not counted as unemployed. Note that Discouraged Workers are a subset of the Marginally Attached. The number of Marginally Attached have increased the past couple of years -meaning the number of job seekers is declining – however the increase in the overall labor force (due to new entrants or reentrants) has more than offset the increase in Marginally Attached.

The third slide shows three of the six official unemployment and labor underutilization rates for Oregon since 2005. The improvements in all the measures is evident, however these measures are still quite elevated relative to pre-recession levels.

While the decline in Oregon’s unemployment rate is due largely to improving labor market conditions and not just due to persons giving up looking for work, what does it look like at the national level? The graphic below shows that the same basic story holds at the U.S. level.

Three main caveats should be included with the above analysis. One, these calculations and figures are net numbers. There is considerable movement of individuals between different categories (in Oregon approximately 14%  13% of all individuals are either gaining or losing a job at any given time) and these relationships are not static. That being said most data is a snapshot in time (stock vs flow.) Two, there are no counterfactuals to these data. It is certainly possible that the labor force should have increased more during this time, thus the declining unemployment rate would not be quite as much. However, maybe the hypothetical increased labor force would have resulted in more employment and not more unemployment (not all labor market entrants are unemployed, some enter because they have a job.) Three, the sample size from which these figures are derived can be problematic. In Oregon the monthly sample size is approximately 1,000 households.

Summary: As shown above, workers giving up looking for work are a part of the story of the declining unemployment rate. However, the vast majority of the change is due to an improving economy (less part-time workers and more total employment.) This is true at both the U.S. and Oregon level. The improvement in the unemployment rate is real.

Many thanks to our friends at the Oregon Employment Department for providing the detailed data and expert feedback and comments on the analysis.