Data Sense: Unemployment rate falls as labor force participation declines
February 28, 2014
According to the latest data from the Colorado Department of Labor, the unemployment rate in Routt County continued its gradual descent through the end of 2013. CDL figures place the December 2013 unemployment rate at 4.5 percent. That’s an impressive drop from the December 2012 rate of 6.3 percent and continues the downward trend in the 12-month moving average unemployment rate that began in October 2012.
But the unemployment rate alone doesn’t tell the whole story about the local labor market. In particular, it doesn’t provide insight into whether the unemployment rate is declining because more jobs are being created or because people have exited the labor force. In fact, if we include those who have exited the labor force back into the calculation, the unemployment rate jumps to 8.9 percent. This certainly could be an indicator that the local labor market is not quite as healthy as the current monthly unemployment rate might lead us to think.
The unemployment rate is a combination of two separate factors: the size of the civilian labor force and the number of jobs. The unemployment rate is equal to labor-force size minus the number of jobs divided by labor-force size. This rate represents the percentage of those in the labor force that are without a job. To be included in the labor force, one must either have a job or actively be seeking one.
Here’s the rub. Those individuals who do not have a job and have stopped looking for work are no longer counted as part of the labor force. So when unemployed people stop looking for jobs, the size of the labor force shrinks and the unemployment rate drops. In fact, it’s possible for the unemployment rate to drop without any new jobs being created at all, and that’s what’s happening in Routt County.
In 2009, the average annual size of the Routt County labor force was 15,296. The average annual number of jobs in 2009 was 14,317. Thus, the average annual unemployment rate during 2009 was 6.4 percent ([15,296 – 14,317]/15,296). Compare this to 2013 when the average annual size of the Routt County labor force was 14,616. The average annual number of jobs in 2013 was 13,765. Thus, the average annual unemployment rate during 2013 was 5.8 percent ([14,616 – 13,765]/14,616). The reduction in the unemployment rate between 2009 and 2013 is surprising because monthly employment peaked in January 2009 at 16,380 and only reached 14,677 in January 2013. There were fewer jobs in the county in 2013, yet the unemployment rate went down.
As it turns out, the unemployment rate actually dropped between 2009 and 2013 because the labor market shrunk by a greater amount (680 people) than the reduction in jobs (552 jobs). There are two primary ways that the labor force shrinks — people either stop looking for jobs or they move away. Both happened in Routt County between 2009 and 2013, but the majority of the decline in the labor force occurred because people stopped actively seeking jobs.
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According to data from the Colorado Department of Local Affairs, the Routt County working-age population (people ages 16 to 64) in 2009 was 17,166 people, compared to 16,988 in 2013. During this same period, the percentage of the working-age population with jobs — known as the “labor-force participation rate” — declined from 89 to 86 percent. So the drop in population took 178 people out of the labor force and the reduction in labor-force participation took 502 people out of the labor force. Thus, almost three quarters of the labor-force reduction was because of the drop in labor-force participation rather than the decline in working-age population. Note that the small drop in population is likely because of a combination of migration and our aging population — what we have previously called “The Graying of Yampa Valley.”
What would the current unemployment rate be if we included those individuals who have dropped out of the labor force? We can calculate this if we use the 2009 labor force (adjusted for the change in population) and the 2013 jobs. When we do this we find that the Routt County “adjusted unemployment rate” is actually 8.9 percent ([15,296 – 178 – 13,765]/[15,296 – 178]). The bottom line here is that if we include those who have exited the labor force, the actual unemployment rate is a lot higher.
The first step in making accurate observations about the local employment situation is to really understand what’s going on inside the numbers. We now understand that the recent reductions in the local unemployment rate are primarily driven by the decline in the labor-force participation rate, not job growth. The labor-force participation rate in combination with the unemployment rate tells us a lot more about the health of the local labor market than the monthly unemployment rate alone.
Brandon Owens is an independent contractor for Yampa Valley Data Partners.