Unemployment is Far Worse Than It Appears

So the parade of bad economic news keeps on rolling.  Today we had some pretty bad unemployment figures for the month of May.  What makes this especially bad is that the unemployment rate is at 9.1% despite the fact that we took out approximately 4 million workers from the labor force since November 2008.  Take a look at the chart below which shows the labor force participation rate since January 1981.

As you can see, the % of the population above the age of 16 that has been participating in the labor force has been at 66% or above since 1988.  Since November of 2008, however, this rate has fallen to 64%, a level not seen since the early 80's when the economy was recovering from years of stagflation.  Why is this important?  The labor force figure provides the denominator in the unemployment rate calculation.   As the next chart will show you, almost all of the decline in the "official" unemployment rate has been because of this decline in the size of the labor force participation rate. In the chart below, I plotted the "official" unemployment rate (in Red) against the unemployment rate if the labor force participation rate had held constant at 66% since November 2008 (in Blue).

As you can see, what I would consider to be the true unemployment rate has barely budged at all off its peak and the rate is also much higher than people realize.  According to the "official" unemployment numbers, the rate peaked in October of 2009 at 10.1% and is now at 9.1%.  But if you use my calculations, the rate peaked at 11.8% in November of 2010 (a level not seen since the depression) and is now at 11.5%.  This is an absolutely dismal and if it was the official printed rate the news stories would be far more apocalyptic than they are today.  An official datapoint that does corroborate my analysis is the employment-population ratio.  That is simply the percent of the population over 16  that is currently employed.  See the chart below:

Again based on this graph, there really has been no recovery in employment, it's all been a statistical mirage.  What is really scary is that there has been no recovery despite the fact that our monetary policy is at 1980's Latin American central bank sort of looseness levels and our fiscal policy as the loosest its been since World War II and yet employment has not budged at all.  With the economy rolling over again, what do we do now?  Let's hope Obama doesn't start arguing for another huge stimulus that goes to infrastructure projects. We now have pretty strong evidence that they do nothing for employment levels over time.