Hidden Labor Force Fluctuations

What is the unemployment rate made up of? It is fairly simple. The formula is those unemployed divided by the labor force.

Unemployed are those people either actively looking for a job or those that have been laid off but are waiting for a recall.

The labor force are those people on payrolls plus those that are unemployed. 

In tracking unemployment, most people will track those that are in the unemployed group. What are the new weekly unemployment claims? What are the continuing jobless claims? These are what people who track the economy fixate on. 

On the other hand, the labor force is not looked at though it is an important part of the employment figure. The labor force tells us who is working or who intends on working. The fluctuations in the labor force tell us a lot about the psychology of the labor market as well. 

Great Recession Labor Force

Let’s look at the Great Recession which is where I first saw that labor force changes do happen and are impactful. 

In October 2008, the labor force hit its peak at 154.9MM workers. The low in the labor force came in December 2009 at 153.1MM workers. To restate that, 1.8MM workers left the workforce in 14 months. They either did not want a job or were too discouraged to look for one. The economy took until almost four years later, June 2012, to reach that previous peak again. 

The unemployment rates in December 2009 was reported at 9.9%. If those that have exited the labor force are counter, the adjusted unemployment rate would be more like 10.9%.

The Great Recession was child’s play compared to what we are currently experiencing.

Coronavirus Labor Force

Let’s look at the recent employment figures. In January 2020, the labor force was reported at 164.6MM and the unemployment rate was reported at 3.6%. By April 2020, 3 months later, the labor force was at 156.5MM, which is a reduction of 8.1MM. The reported unemployment rate was 14.7%. Once those that temporarily left the labor force were accounted for, the adjusted unemployment rate was 19.0%. 

Of late, the labor force and unemployment figures have slightly recovered. The reported unemployment rate was 11.1% in June 2020. The adjusted unemployment rate, accounting for those that have still left the labor force, is 13.6%

The Labor Force Is Still Evolving

A lot of the employment picture has yet to come. It will be a few years from now where we fully grasp not only the unemployment rate but the overall labor force.

Here are some questions that come to mind that I will leave you with:

  • What happens to employment once the unemployment insurance relief of $600 extra per-week ends after July 2020?
  • When will the labor force get back to previous peak levels?
  • If the pandemic continues, will more people leave the labor force?
  • Will those that have left the labor force need to re-enter it if they run out of savings?
  • Will people that leave the labor force cause the reported unemployment rate to decrease?