Is the Dropping Unemployment Rate Masking High Underemployment?

U.S. is at ‘full employment,’ but there are significant numbers of involuntary part-time workers, discouraged job seekers

Roy Maurer By Roy Maurer December 20, 2016
Is the Dropping Unemployment Rate Masking High Underemployment?

The latest national jobs data showed the lowest unemployment rate in years, but the reasons behind it may not all be good news, according to labor market experts.

The unemployment rate dropped significantly from 4.9 percent to 4.6 percent in November, according to the monthly jobs report from the Bureau of Labor Statistics released Dec. 2.

An unemployment rate under 5 percent is what most economists consider "full employment," which is when the number of people seeking jobs is roughly in balance with the number of job openings.

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Consistent job growth is likely pushing the unemployment rate down.

"Job growth is the main reason that unemployment has fallen from 10 percent at the worst of the recession to 4.6 percent today," said Jed Kolko, chief economist for Austin, Texas-based job search site Indeed.

Gad Levanon, chief economist, North America, for The Conference Board, a business membership and research association based in New York City, predicts the unemployment rate will continue to fall. "With so many Baby Boomers retiring, job growth in the range of 150,000-200,000 new jobs [each month] is enough to continue lowering the unemployment rate, even if some people rejoin the labor force. I expect the unemployment rate to be 4.3-4.4 percent a year from now."

However, the low labor force participation rate (62.7 percent) has caused concern among some analysts. The labor force participation rate refers to the number of people who are either employed or actively looking for work. From 2006 to 2016, the labor force participation rate hovered in the 62 to 67 percent range, with a consistent decrease since 2009. It hit its peak of 67.1 in 2000.

"A big part of this decrease is merely because so many members of the large Baby Boomer generation have retired," said Jennifer Schramm, SHRM-SCP, manager of workforce trends at the Society for Human Resource Management. "Another factor is that young people, who in the past may have already entered the workforce by now, are still in college and graduate school. That's actually a positive thing for the economy, as it hopefully will translate into a more-highly skilled workforce in the future."

Kolko pointed out that the labor force participation rate for prime-age (25-54) adults has actually increased in the past year, from 80.8 percent in November 2015 to 81.4 percent today.

"However, there is a category of adults that are not in the labor market because they are discouraged job seekers," Schramm said. "These are individuals who want to work but have given up on finding a job. Any increase in this group is likely to give rise to a more pessimistic view of the job market."

Discouraged labor force dropouts and those who take part-time work out of necessity are not counted as unemployed. The 4.6 percent figure only considers those who are jobless and have been looking for a job in the past four weeks.

November's unemployment rate would double if it also counted those individuals who have either given up looking for work but want a job or who are working part time but want a full-time job.

The "underemployment" or U-6 rate, as this measurement is referred to, is at 9.3 percent, the lowest since April 2008. "The broader U-6 rate, which includes discouraged and underemployed workers, is always higher than the headline rate but is also at its lowest level in years and has steadily improved throughout the recovery," Kolko said.

Levanon said the current underemployment figure is unusual—and problematic. "It is a unique situation where, on the one hand, the short-term unemployment rate is historically low and other measures of recruiting difficulties are suggesting that the labor market is tight, but at the same time the rates of long-term unemployed, discouraged workers and involuntary part-time workers" are still high.

In addition, today people are typically unemployed for longer, Kolko said: Among those who are unemployed, 24.8 percent have been without work for at least six months, compared with 17.5 percent in August 2007, when the overall unemployment rate was the same as today. 

Part-Time Work the New Normal?

The share of people working part time because they can only get part-time hours is 44.6 percent higher than it was in 2007, according to new research from the Economic Policy Institute (EPI), a think tank based in Washington, D.C.

"There is not only an incomplete recovery in the labor market—which is likely inhibiting the strength of economic expansion—but greater labor market hardship for many workers than is apparent on the surface," said Lonnie Golden, an EPI research associate and professor of economics and labor-employment relations at Pennsylvania State University, Abington College. He is also the author of the EPI report Still Falling Short on Hours and Pay.

Golden called the involuntary part-time employment rate the most consistent indicator of underemployment. "That it remains stubbornly high indicates that there is more labor market slack than is captured by the unemployment rate alone," he said.

However, Kolko observed that involuntary part-time employment moves with the state of the economy and that the number of people working part time involuntarily is down nearly 40 percent from November 2009.

Impact on Employers

The EPI report suggests that in addition to the lingering effects of the recession, "there is an ongoing structural shift in many businesses toward more-intensive use of part-time employment, driving the elevated rate of involuntary part-time employment."

This is particularly evident in industries in which part-time jobs are already more prevalent, such as retail, hotels and food service, according to the report.

"Retail trade and leisure and hospitality contributed 63.2 percent of the growth of all part-time employment since 2007, and 54.3 percent of the growth of involuntary part-time employment," Golden said. "These two industries, together with educational and health services and professional and business services, account for the entire growth of part-time employment and 85 percent of the growth of involuntary part-time employment from 2007 to 2015."

Research shows, too, that many U.S. workers feel underemployed, which could drive down productivity. "Having a lot of people working in jobs that they don't feel make full use of all the investments they've made into their own learning and skills could have a real impact on employee satisfaction and engagement," Schramm said.

And while so many individuals are not able to find jobs that match their skills and training, HR professionals are reporting real difficulty finding people with the right skills and qualifications for the vacant jobs they are trying to fill. "These two trends—underemployment and skills shortages—happening simultaneously seem to point to inefficiencies in how we are developing workforce skills," Schramm said.

"A better link between the educational investments made by individuals and the skills that are most in demand by employers would help both job seekers and businesses."

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