Wednesday, May 29, 2013

When it Comes to Data, Beware the Oversimplified Headline

By Matt DeVeau, Project Associate.

We’ve been on a run of positive economic news lately. New home sales are rising, jobless claims are falling, and consumer confidence is at a five-year high. Things are looking up, it would seem. But when I talk to friends and family, many of them still have their doubts. In some ways, that’s understandable. The Great Recession and the long, slow recovery from it have been unlike anything most of us have experienced in our lifetimes. But I also get the sense that we may also have a “headline problem.” Consider this one from USA Today on April 7:

“Drop in labor participation rate is a distress signal.”

The first few paragraphs of the story elaborate: While the national unemployment rate declined by 0.1 percentage points in March, it “fell for the wrong reason.” The labor force participation rate – that is the number of people working or actively looking for work – fell by 0.2 percentage points to 63.3 percent a 34-year low.

Oof. That sounds really bad, right? Well, maybe. But it’s not quite that simple.

The labor force participation rate (LFPR) has a lot of moving parts. People may exit or enter the labor force for a variety of reasons – good, bad, and indifferent. But as far as the top-line LFPR metric is concerned, an individual who has retired to a comfortable life of playing golf and spoiling grandchildren is counted the same as someone who wants to work but has given up all hope of finding a job and has stopped looking. To its credit, the latter part of the USA Today article does explore the issue in a bit more depth, but to the person who consumed this news via Twitter or a 20-second television or radio segment, the story was simply: “The unemployment rate was lower, but only because people gave up looking for work.”

But in reality, LFPR is heavily influenced by other factors. One notable example is demographics. Consider the following chart from Valeo Financial, an Indianapolis financial planning firm:

Source: Valeo Financial; U.S. Bureau of Labor Statistics (Click to enlarge.)

This chart shows the profound impact that the Baby Boom generation has had on the labor force. The LFPR began to ramp up when the first members of this generation turned 25 and reached historic heights during the years in which all of this generation fell between the prime working ages of 25 and 54. As Baby Boomers began to age out of the workforce, the LFPR began to fall – forming a graph that sort of resembles a Bell Curve. Said David W. Stelsel of Valeo in the accompanying post: “Though it is difficult to forecast the future direction of the U.S. civilian labor force participation rate, demographics are an important factor to consider.”

But what of people who want to work but have given up? The Bureau of Labor Statistics calls these individuals “discouraged workers” and tracks them through its Current Population Survey, which is also used to calculate the LFPR. The BLS defines a discouraged worker as someone who has searched for a job in the previous 12 months but not in the previous four weeks due to reasons such as: “thinks no work available, could not find work, lacks schooling or training, employer thinks too young or old, and other types of discrimination.” The following graph shows discouraged workers as a percentage of the total population 16 years of age and older who are not in the labor force from January 1994 to April 2013: 

Not surprisingly, the proportion of discouraged workers surged during the Great Recession and remains far above pre-Recession levels. But if you were to smooth out the monthly peaks and valleys, the percentage of discouraged workers has been falling in recent years. Between February and March – the month-to-month time period highlighted in the USA Today article – the number of discouraged workers decreased from 885,000 to 803,000. In short, the decline in LFPR mentioned in the article was not driven by people “giving up” in the traditional sense of the term. 

This is not to say that everything is just fine. The times certainly remain hard for many people. And even if the falling LFPR is primarily a consequence of demographics, that’s not necessarily a good thing either – we could soon be faced with a lot of retirees and a relatively small pool of taxpayers in the workforce to finance things like retirement benefits and health care. 

Instead, the point – as always – is to consider the full context of the data before drawing a final conclusion. The above is just a brief exploration of the issue. The full context can’t be provided in an 800-word blog post, let alone a headline.