- The Washington Times - Monday, August 9, 2004

The good news on unemployment last month was hidden beneath the official data. The Labor Department reported the national unemployment rate ticked down a tenth in July to 5.5 percent, a 33 month low. But the decline among the inactive unemployed was much greater.

The inactive or “hidden” unemployed are people not currently looking for work, but who enter the job market in the hope of finding work when they see employment prospects improve. The inactive unemployed are not included in the official unemployment count, although the concept and measurement of hidden unemployment is well established in the economics literature.

The short-term behavior of hidden unemployment is in part reflected in the month-to-month movements of the labor force participation rate — the proportion of the working-age population in the work force. Last month, the participation rate jumped up, from 66.0 percent in June to 66.2 percent in July, as substantial numbers of the hidden unemployed entered the active job market. Had they not found jobs, the official unemployment rate would have soared. It didn’t. Why? Because they found jobs.

The Labor Department collects employment data from two independent surveys based on employer payrolls and household interviews. When survey results conflict, economists tend to favor the employer survey mainly because of its larger sample size. But even if employment from the household survey is second best, it still has validity and should not be ignored, as it frequently is. Last month it had a lot to tell.

It’s the household-generated employment count that directly influences the official unemployment rate — both come from the same survey. So it’s inconsistent for the media and other data users to accept and highlight the unemployment rate every month but ignore its sibling statistic on employment. Both the employer and household employment data should be taken into account in assessing the monthly job situation.

The rise in payroll jobs last month was tepid, although it was the 11th monthly increase in a row. In contrast, household-measured civilian employment surged more than 600,000, among men, women and teenagers. The rise in civilian employment absorbed the normal population increase in the labor force, about 150,000, plus an estimated 420,000 hidden unemployed. The decline in hidden unemployment was equal to a 0.3 percentage point drop in the unemployment rate — a dramatic improvement.

The strong rise in civilian employment last month was not mentioned in the opening summary statement of the Labor Department’s press release. The summary routinely features payroll employment, but it has been more than seven years since the lead-off section of the release last mentioned civilian employment. Earlier that was not the case. For example, 10 years ago, in 1994, the opening sections of five different monthly releases noted the rise in both employment series. In four out of five of those months, as reported at the time, the rise in civilian employment exceeded the rise in payroll jobs. There were similar instances in 1995, 1996, and early 1997.

For last month, overall it’s fair to say the unemployment picture brightened substantially, more than the official jobless rate showed, and that employment continued to improve.

Another bright spot in the July labor market was the rise in earnings of production workers. Hourly earnings rose 5 cents and weekly earnings jumped by $3.25. The average workweek also rose slightly in both the private nonfarm and manufacturing sectors. Factory jobs also gained ground, as did jobs in health care, professional and business services, wholesale trade, and mining.

If Alan Greenspan is right and the economy is passing through a temporary soft patch, the job market can be expected to strengthen in the next month or two. There will be only two more employment reports before the presidential election, so a lot is riding on the Fed chairman’s prediction.

Alfred Tella is former Georgetown University research professor of economics.

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