What’s missing in NC jobless rate calculations are 300,000 workers

There’s a large disconnect in perceptions of the current state of North Carolina’s labor market.

Gov. Pat McCrory stated a positive view in a recent address in Chapel Hill: “We’ve had one of the largest drops in unemployment [rates] in the country.” His more general contention was that the state’s labor-market difficulties are “being resolved” by tough choices made by his administration.

A contrary view was voiced by a recent letter-writer who said we’re still in the midst of a terrible recession.

These views seem contradictory, but it is easy to reconcile the two. McCrory ignores the 300,000 working-age adults who have dropped out of the labor force since 2010. If we assert that they’re gone, our unemployment rate is a high but acceptable 6.8 percent. If we recognize that these are productive residents who have temporarily stopped looking for work, then our unemployment rate is a terrifying 12.4 percent.

One fact on which everyone agrees: The economy in North Carolina in January 2010 was about as bad as it has been. From a peak of 4.3 million people in January 2008, employment in the state had fallen to a low of 4.1 million people in January 2010. The unemployment rate in that month was 11.2 percent.

Employment in August 2014 stood at 4.34 million: 240,000 more jobs than in January 2010 (and 40,000 more than in January 2008). The unemployment rate had fallen to 6.8 percent in that month.

There’s a curious fact, though, that gives credence to the “still in terrible recession” conclusion.

From January 2010 to August 2014, the state population over the age of 15 rose from 7.17 million to 7.70 million, or an increase of 530,000 residents. If we began with 11.2 percent unemployment in January 2010 and created only 240,000 jobs for 530,000 new working-age residents, it’s difficult to understand the abrupt drop in the unemployment rate.

The unemployment rate is calculated from the reports of working-age adults. If an individual indicates that she is either employed or actively seeking employment, she is counted as part of the labor force. If she is not actively seeking employment, she is outside the labor force. The unemployment rate is the ratio of the number actively seeking employment to the total labor force.

If someone is unemployed but stops looking for work, she is not included in the calculation of the unemployment rate. My calculations indicate there have been 300,000 such residents in North Carolina since January 2010.

Economists have a name for the share of working-age adults who are in the labor force: the labor-force participation rate. In North Carolina, that ratio had values in excess of 2/3 during the 1990s and as recently as the end of 2006 (meaning that of every three people above the age of 15, two of them on average were either employed or looking for work.) The ratio on average for the U.S. was about 2/3 as well in that time frame. With the recession of 2007/2008, the ratio began to fall in North Carolina. It was 64.4 percent in January 2010. By August 2014, the participation rate in North Carolina had declined to 60.5 percent.

Percentages alone do not do justice to the enormity of the shift. This shift in the participation rate represents more than 300,000 working-age residents who have stopped looking for work. If we ask what the unemployment rate would be today if the participation rate had stayed at 64.4 percent, we find a surprising result: The unemployment rate would be 12.4 percent in North Carolina. A terrible recession, indeed! Job creation over the last four years has not kept pace with the growth in the working-age population.

This is not a partisan issue. In my introductory economics class, we define efficiency as the “absence of waste.” It is surely a waste of a state resource if willing workers are unemployed. The missing 300,000 includes a large share of skilled workers who can be productive members of society.

These missing 300,000 workers are not just people reaching retirement age. The annual increase in the number of residents aged 66 and above is only 40,000. Also, many people of retirement age find they must remain working.

We need to resolve the problem of the missing 300,000. Ignoring them or treating them as permanently retired is not satisfactory. If unemployed due to a lack of skills, a jobs-training program is appropriate. If unemployed because of refusing to leave a rural county that has lost its employment base, the governor’s business recruitment plan should be even more sharply directed to the rural counties. If unemployed because aggregate demand in the state has not yet recovered enough, accepting the expansion of Medicaid under the Affordable Care Act or participating in extended federal unemployment insurance could bring them back into employment.

Ignoring the problem will not make it go away. Waiting years for a resolution will be a loss for the state – a loss of production, a loss of income, a loss of heart.

Patrick J. Conway is chairman of the Department of Economics at the University of North Carolina at Chapel Hill. He doesn’t speak for UNC-CH