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The economy added a total of  117,000 jobs in July. That is better than consensus expectations for a gain of 84,000. This report was a bit better than the ADP report on Wednesday. That report showed 114,000 private sector jobs created, and the expectations were for the BLS to show 100,000 new private sector jobs.

The “actual” BLS number of private sector jobs was 154,000. Government payrolls declined by 37,000. The Federal Government actually added 2,000 jobs. The State (-23,000) and Local (-16,000) levels laid off a total of 39,000. Thus, more than all of the losses were coming from the state and local government level.

Unemployment Rate Ticks Down

The unemployment rate, which is derived from a separate survey, showed a decrease to 9.1% from 9.2% in June. The consensus was looking for the unemployment rate to remain at 9.2%. The unemployment rate “should” have increased, as the Civilian Participation rate fell to 63.9% from 64.1%, and is down from 64.6% a year ago. In other words, the unemployment rate dropped simply because of people giving up and dropping out of the labor force.

Upward Revisions

The awful numbers for June and May were revised higher. Still very ugly, but not quite as bad as we had thought. In June we “actually” gained 46,000 jobs, not the 18,000 reported last month. In May, we gained 53,000 jobs, close to the 54,000 originally reported and much better than the 25,000 as was reported last month.

Late last year and in the early months of 2011, the revisions had been running strongly positive, so the downward revisions for two months in a row was a disturbing development. The return to positive revisions is a very good development, even if the levels are still very disappointing.

The private sector revisions were up, driving most of the overall positive revisions. We actually added 80,000 jobs in June, not the 57,000 reported last month. In May, the gain was 99,000, not 73,000, or the first estimate of 83,000 jobs gained. These revisions are a good sign and should not be overlooked.

If you add the upward revisions from the July reported gains, you get a gain of 173,000 total jobs, and gain of 203,000 in the private sector. That is still a mediocre performance, but not awful like we had last month.

Household vs. Establishment Surveys

The unemployment rate is derived from a separate (household) survey from the total number of jobs (establishment) survey. The household survey had been generally more upbeat than the establishment survey earlier this year, but not recently. In June, it showed a drop of 445,000 jobs. This month, it is pointing to a loss of 38,000 jobs.

The number of people unemployed according to the household survey, on the other hand, fell by 156,000 in July after rising 173,000 June. However, generally the numbers from the household survey are considered less reliable than are the numbers from the establishment survey. That does not mean they should be disregarded entirely, and the divergences between the two series are often the biggest near turning points in the economy.

The household survey does a much better job of picking up people who are self-employed, and of very small start-up businesses than does the establishment survey. The fall in both the number of employed and the number of unemployed means that the civilian labor force contracted, which is unusual given a growing population, and indicates more people are simply discouraged about the prospects of ever finding a job again and have simply dropped out of the labor force.

Employment vs. Unemployment Rates

The unemployment rate fell to 9.1% from 9.2%; it was at 9.8% as recently as November. A year ago the unemployment rate was 9.5%. The civilian participation rate, or the percentage of people in the labor force, both employed and unemployed was fell to 63.9 from 64.1%, its second drop in a row. It had been holding at 64.2% since January and is down from 64.6% a year ago.

The employment-to-population ratio, or the employment rate, also fell for the second straight month to 58.1% from 58.2% -- it had been at 58.4% for most of the year so far. It was also at 58.4% a year ago. Normally at this point in the cycle it should be the participation rate that is rising, and the employment rate rising, or at least staying unchanged. A fall in the unemployment rate from a falling participation rate is not really such great news.

Average Workweek

For all employees, the length of the average workweek remained at 34.3 hours; it is up from 34.2 hours a year ago. For production and non-supervisory employees, the length of the average workweek was unchanged at 33.6 hours. A year ago it was at 33.5 hours.

Average hourly earnings for all employees rose to $23.13 from $23.03 and are up 2.3% from $22.61 a year ago. Average hourly earnings for production employees rose $0.08 to $19.52 for the month, and is up 2.3% from $19.08 a year ago. The year-over-year changes are not great, but then again, inflation is pretty low as well. It is not inflationary from a cost push point of view because it is less than the rate of productivity growth (see "Productivity Slows, but Beats").

Income growth in the middle and lower half of the income distribution has been sorely lacking, not just recently, but for over a decade. Well, actually, it has been pretty bad for the bottom 90% of people, but particularly anemic for the lower half of the income distribution. Higher incomes for those who are working means higher sales and more quickly repaired household balance sheets.

The anemic growth in average hourly earnings is not a good thing for the economy, although it is good news for corporate profits, and hence the stock market, at least in the short term. It also means that it will be tough for a generalized increase in overall prices (aka inflation) to occur, as opposed to increases of relative prices of highly visible prices such as food and gasoline.

Participation Rates Falling

While the unemployment rate is better than last month and a year ago, most of that is a mirage due to falling participation rates. A falling participation rate is not exactly a new development, it has been in a downtrend for a decade now, but the decline has been very steep in the Great Recession and has yet to really turn around.

Employment and Participation Rates

While the unemployment rate gets the headlines, it is worth digging just a little bit deeper into the number. The unemployment rate is really the civilian participation rate divided by the employment rate, also known as the employment population ratio. The total population (over 15 years old) is divided into three groups, the employed, the unemployed and those not in the workforce.

The participation rate (blue line in the graph below) is the percentage that are either employed or unemployed. It will never reach 100%. For that to happen, the social security retirement age would have to be raised not to 67 or 68, but to 167. The highest the participation rate ever reached was 67.3% in April of 2000. The participation rate will normally slump during a recession and its aftermath.

However as the first graph below shows, the participation rate was in a huge secular increase from the mid-1960’s until the end of the 20th century. Yes, it would flatten out and decline slightly during recessions, but it would always return to a higher high, and the low during the next recession was always much higher than the previous low.

That did not happen in the last expansion. The highest the participation rate hit during the last expansion was 65.8% in January 2005. In June, the participation rate fell to 63.9% from 64.1%. It had been at 64.2%, since the start of the year, but generally has been trending downward. It was 64.6% a year ago.

The employment rate fell to 58.1% from 58.2%, and down from the 58.4% rate of a year ago. The dip in the employment rate is bad news. The employment rate is a very underappreciated economic statistic and really should be much more widely reported.

The Historical Context

The secular rise in the participation rate was due to two huge demographic trends. First was the entry of the Baby Boomers into the workforce. Remember you are neither employed not unemployed when you are a kid. The Baby Boom started in 1946, so by the mid-1960’s they were reaching the age when they were either employed or unemployed (or in Vietnam). That was a major force lifting the participation rate until the early 1980’s.

The second major demographic force that started just a bit later (in force) but continued longer was the increased participation of women in the labor force. Back in the mid-1960’s if a magazine article mentioned the words "woman" and "labor" in the same paragraph, odds were that the article was about childbirth. That clearly is no longer the case today. In July, there were 63.22 million women working (over age 20), not that much behind the 71.84 million men with jobs (per household survey).

The front end of the Baby Boom is just now hitting retirement age, and that will put continuing downward secular pressure on the participation rate for years to come. The participation rate took a big dive during the early part of the recession, started to rebound early in 2010 this year, but then trended back down again in the second half. It had been steady at 64.2% in 2011, but now its downward slide has resumed.

A rising participation rate will put upward pressure on the unemployment rate, but should nevertheless be considered to be good news. A falling participation rate will lower the unemployment rate, but is bad news for the economy. We should be seeing the participation rate rise, not fall, two years after the official end of the recession.

Over the longer term, though, the rebound in the participation rate is likely to be limited by the baby boom retirement wave. In other words, while this report was a relief that is was not another disaster, the real situation is worse than the headline numbers suggest.

Pay Attention to the Employment Rate

The other side of the decomposition of the unemployment rate is the employment-to-population ratio, or the employment rate (black line). That is the percentage of the population that actually has a job. One way or another, these are the people that have to support the rest of the population. This is a hugely under-reported number, and one that deserves a lot more attention than it gets.

Like the participation rate, it had been in a secular upward trend from the mid-1960’s through the end of the century. It is, however, much more volatile than the participation rate (it has to be, if it always moved in tandem with the participation rate, the unemployment rate (red line, right hand scale) would never change).

Its high water mark was 64.7% in April 2000. Unlike previous recoveries, it never came close to hitting a new high after the 2001 recession was over, only getting back to 63.7% in March of 2007 before starting to fall again. During the Great Recession it really fell off a cliff, hitting 58.2% early in 2010. It erratically pushed its way higher through the middle of 2010, but then collapsed back to 58.2% in November. Now we have set a new low that has not been equaled since November of 1983.

It is hard to be all that upbeat about an employment report which shows generational lows in both the participation and employment rates. (graph from this source). 

Better Than the Last Two Times

Note that in the 1991 and 2001 recessions, the employment rate (employment population ratio on the graph) continued to decline for a very long time after the recession ended. The NBER declared the Great Recession officially over as of June 2009. You would never know it from listening to the press or the pundits, but this recovery has been better on the jobs front than the two recessions that preceded it, particularly when it comes to private sector employment.

However, both of those recoveries were far slower than all of the post-war recoveries that preceded them. The employment rate should get more attention than it does, and the unemployment rate less, although clearly the two numbers are related. The unemployment rate though can be more subject to distortions than can be the employment rate. Over the last year, most of the decline from 9.5% unemployment to 9.1% has been due to the drop in the participation rate, and was thus an illusion.

As a matter of economic history, it should be noted that both Presidents Carter and Reagan get a bit of a bum rap when it comes to the unemployment rate. Clinton’s job record was even better than the unemployment rate alone would suggest. When the participation rate is rising, the economy has to produce significantly more jobs to keep the unemployment rate from rising. On the other hand, the second president Bush gets way too much of a free ride when it comes to the unemployment rate, since the participation rate was falling for most of his time in office. The same is true for Obama.

Duration Measures Mixed

There was mixed news on the duration of unemployment front. Over time, the number of short-term unemployed really does not vary that much. People are always losing jobs -- or in boom times, quitting jobs.

Next week we should get the Job Openings and Labor Turnover Survey (JOLTS), which will tell how many people are getting laid off versus quitting and the actual number of new jobs created. The numbers today simply show the net difference between jobs lost and jobs gained, rather than the totals for each side, which are FAR larger. Unfortunately, the JOLTS data will be for June, not July.

It is the number of long-term unemployed that really make the difference between boom and bust. The extraordinarily long time that people have been out of work after they lose their jobs is what has really set this recession apart from all the previous pre war recessions.   

The average duration of unemployment (red line) rose to 40.4 weeks from 39.9 weeks in June, a year ago it was at 33.9 weeks. The year-over-year change, however, is exaggerated. The definition was changed in January, so the historical comparison for the average is now meaningless, or at least has to be taken with more than a grain of salt.

Previously, if someone reported being out of work for more than 2 years, the BLS would enter them in the database for being out of work for 2 years. The maximum was changed to 5 years. While an interesting statistic, and relevant in the face of the “99ers,” or those who have been out of work so long that they have exhausted even their extended unemployment benefits.

The month-to-month change is still for real, but the change in the definition makes the longer-term historical comparisons less relevant. For what it's worth given the change in the definition, this is a new record high for the average duration of unemployment. Prior to the Great Recession, the previous all-time record high was set in June of 1983 at 20.8 weeks, but that too was under the old definition. Still, a near-doubling from the previous record (prior to this cycle) is very noteworthy.

Median Duration

The median (blue line, half above, half below) duration will always be lower than the average duration since it is impossible to be unemployed for less than zero weeks. It is also not distorted by the change in “top coding” of the data. Its history is not quite as long as the average, but is at least consistent in definition for the whole history.

There the news was also a bit better. It fell to 21.2 weeks, from 22.5 weeks in June, and down from 21.7 weeks a year ago, but a year ago was the all-time record high. Given the change in the definition for the average, the median is the more reliable statistic right now, but both are telling pretty much the same story. If you are out of work, you are having a very hard time finding a new job.

Prior to this downturn, the highest the median duration had ever hit was 12.3 weeks in May of 1983.  Note that it is normally the case that the duration of unemployment continues to rise even after the recession ends. This happened not just in the last two recoveries, but in all post-war recoveries.

However, following the 1991 and 2001 downturns the persistency of high and rising unemployment duration was much more pronounced than in the earlier downturns. This time, while the peak was an Everest relative to any previous experience (except perhaps for the Great Depression, but that data is not available).

Long-Term vs. Short-Term Unemployment

Long-term unemployment is a very different experience than short-term unemployment. It is not just an unplanned unpaid vacation, it is an existential threat to your standard of living. When you lose your job you don’t know how long it will take you to find a new one.

You get unemployment insurance benefits (usually, but not always, and eligibility requirements are tighter now than in previous recessions and many states are tightening them up even more) but in general, they cover just 60% of what you were earning when you were employed, up to a cap of around $400 per week (varies a bit by state). The nationwide average is about $300 per week.

Thus for most, the pay cut is much more than 40%. Most people have fixed, or at least semi-fixed, expenses that use up more than 60% of their income. They thus have to dig into their savings and/or run up their credit cards.

It is also much harder to get a job if you have been out of work for a year than if you have been out of work for just a month or so. Many employers will not even look at the resume of someone who has been out of work for over a year.

Regular state unemployment benefits run out after 26 weeks (although going forward, several states have recently cut that to 20 weeks), and after that people move over to extended benefits which are paid for by the Federal Government.

By the point that people get to the six-month mark of joblessness, they have usually depleted most of their savings outside of their 401-k or IRA plans, and may well have started to dip into those as well (in the process paying a 10% penalty plus having the withdrawals taxed as ordinary income). That is particularly true this time around because going into this recession the savings rate was at a historic low.

Home Equity No Longer an Option for Most

In past downturns, the unemployed who were also homeowners could generally tap into their home equity to tide them over. With over 25% of all homes with mortgages now underwater, and another 5% with less than 5% positive equity, that option is no longer available for millions. Thus, without extended benefits these people would be left with no financial resources at all.

However, the extended unemployment benefits are divided up into several different tiers. Even though benefits were extended for 2011, the maximum is still at 99 weeks. The extension was more about people who have been out of work for 40 weeks or 60 weeks continuing to get benefits, not people getting benefits beyond 99 weeks.

Please note that you are counted as unemployed if you don’t have a job and have been looking for work over the last month. It does not matter for the unemployment rate if you are getting benefits or not. Given the recent deal to avoid going over the debt ceiling, it now looks very unlikely that unemployment benefits will be extended again, leaving millions with no income at all. That is obviously bad news for those people, but it is also extremely bad news for the economy.

4 Different Groups of Unemployment

The census bureau tracks four different groups by length of unemployment. The short-term unemployed are those that have been out of work for less than five weeks (red line). Almost always this is the largest group of the unemployed.

The next biggest group is usually those that have been out of work between five and 14 weeks (orange line). Being out of work for a month is really not that big a deal, but as the joblessness stretches on it becomes a bigger and bigger problem. Not only do your finances start to run dry, but your contacts start to dry up and your skills start to wither.

The longer you are out of work, the lower your likely salary once you return to work. Normally the next two groups, those out of work for 15 to 26 weeks (green line), and those out of work for more than 27 (blue line) weeks are a very small proportion of the total unemployed. 

That changed in a very big way during this downturn, and in July, 6.185 million, or 44.4% of the 13.931 million total unemployed have been looking for more than 26 weeks. That is an decrease of 104,000 from June, but still an exceptionally high number. The peak in long-term unemployed was in June of 2010, when there were 6.710 million very long-term unemployed -- or 45.6% of the total unemployed then.

The numbers in the graph below are not adjusted for population growth, so we should expect to see a bit of an upward tilt in all four groups over time. Still, in a healthy economy, the number of very long-term unemployed should be down closer to 1 million, not above to 6 million. On the other hand, the 2.687 million (down 387,000 from last month) who are out of work for less than five weeks is actually slightly lower in absolute terms than the average of the last 30 years (despite population growth over that time).

Note that in every prior post war recession, the number of short-term unemployed remained the largest group. The massive number of long-term unemployed is really what sets this downturn apart from all the previous ones.

Later today, I will post part two of my analysis of the employment report, where I will focus on the demographics of joblessness, and on where in the economy jobs are being created or lost. I will also give more of my thoughts about what we should be doing about the employment situation, and the significance of this report in a larger historical context.

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