July 13, 2015
Last month the unemployment rate fell from 5.51 to 5.28 percent. Some news outlets have reported on this news rather cheerily, viewing the falling unemployment rate as a sign of a strengthening economy.
It’s not clear that such optimism is warranted. As I’ve previously argued, the unemployment rate likely understates the level of slack in today’s labor market. This is because workers are only counted as unemployed if they are actively searching for work, meaning that if they become discouraged with their job prospects and completely give up their searches for employment, the unemployment rate falls. Given that employment has remained depressed for almost eight years at this point, it’s entirely conceivable that many unemployed workers have been out of work so long that they’ve given up looking for work. The best way to correct for this problem is by looking at the employment rate of prime-age Americans (those aged 25 to 54) rather than the unemployment rate.
In January 2015, the prime-age employment rate reached a six-year high of 77.2 percent. However, since then the rate has flat-lined: the prime-age employment remained at 77.2 percent in March, April, May, and June of this year. Between October 2011 (when the prime-age employment rate hit its last significant trough) and January 2015, the prime-age employment rate increased at a pace of about 0.06 percentage points a month; had employment continued growing at this rate between January and June of 2015, the prime-age employment rate would have been 77.5 percent last month.
It’s possible that, because of how erratic the monthly employment numbers can be, the prime-age employment rate will shoot up dramatically over the next few months. There is considerable sampling error in this series, so given past patterns, the flatness of the last quarter may just be a statistical fluke. But this is a trend worth watching.
