Skip to main content

The Globe and Mail

Why the U.S. jobless rate may be a 'head fake'

Students wait in line outside a job fair in New York last month. One of the reasons the U.S. unemployment rate has fallen so much is an exodus of people from the work force.

ANDREW BURTON/Reuters

U.S. economic indicators don't add up.

The unemployment rate has plunged to 8.2 per cent from 9.8 per cent over the last couple of years. That's a big drop. Yet the economy is only growing at a moderate rate. Gross domestic product hasn't expanded at an annual rate faster than 3 per cent in seven quarters through the one that just ended in March.

Tom Porcelli, Royal Bank of Canada's chief U.S. economist in New York, says the unemployment rate is a "head fake." Based on the relationship between the unemployment rate and the real GDP growth rate between 1950 and 2008, the U.S. economy should be advancing at a rate of about 3.9 per cent. That's recovery velocity, and the U.S. economy managed that pace for a few quarters in 2009 and 2010. But it didn't hold. The link between the unemployment rate and GDP apparently is broken.

Story continues below advertisement

Considerable academic energy is being used to try to understand why the unemployment rate and GDP appear to be telling different stories.

Federal Reserve chairman Ben Bernanke, for example, suggests that the rapid drop in the unemployment rate reflects a similar outsized surge in the jobless rate at the start of the recession. He's of the view that the unemployment rate could level off around 8 per cent.

That's still high by historical standards and is the biggest reason the Fed is set to leave its benchmark interest rate near zero until the end of 2014.

While the search of an explanation continues, Mr. Porcelli is turning to another measure of the labour market to guide his thinking on the state of the economy. He says the employment-to-population ratio better reflects what is going on in the overall economy.

One of the reasons the unemployment rate has fallen so much is an exodus of people from the work force. The participation rate of workers aged 20-24 has declined to 71 per cent from closer to 75 per cent a few years ago; the participation rate of those aged 25-34 has dropped to 82 per cent from 84 per cent in 2008. For Mr. Porcelli, this why the unemployment rate can't be trusted as a barometer of economic health. It has declined for the wrong reasons.

So when the Labour Department releases its next jobs survey on Friday, the Royal Bank economics team will be watching the employment-to-population ratio. Based on that numbers relationship to GDP over the 1950-2008 period, the U.S. economy should have grown at an annual rate of 2.2 per cent over the past couple of years. The actual result, according to Commerce Department figures: 2.3 per cent.

Report an error Licensing Options
About the Author
Senior fellow at the Centre for International Governance Innovation

Kevin Carmichael is a senior fellow at the Centre for International Governance Innovation, based in Mumbai.Previously, he was Report on Business's correspondent in Washington. He has covered finance and economics for a decade, mostly as a reporter with Bloomberg News in Ottawa and Washington. A native of New Brunswick's Upper St. More

Comments are closed

We have closed comments on this story for legal reasons. For more information on our commenting policies and how our community-based moderation works, please read our Community Guidelines and our Terms and Conditions.

Combined Shape Created with Sketch.

Combined Shape Created with Sketch.

Thank you!

You are now subscribed to the newsletter at

You can unsubscribe from this newsletter or Globe promotions at any time by clicking the link at the bottom of the newsletter, or by emailing us at privacy@globeandmail.com.