Bastiat and the Unemployment Rate

Drops in the labor-participation rate and dramatic changes in America's energy sector make the unemployment rate unreliable.

Political economist Frédéric BastiatThe U.S. Department of Labor’s Bureau of Labor Statistics (BLS) reported on Friday, February 3, 2012, that the national unemployment rate dropped to 8.3 percent. Mainstream media outlets trumpeted that unemployment figure as vindication of Obama’s command-and-control stewardship of the nation’s economy. But remember Frederic Bastiat’s admonition from 1850 to see “that which is not seen.”

What the media conveniently left out of its Obama-boosting reportage is that the reduction in the unemployment rate is not due to 243,000 jobs being created in January. Nearly that level of job creation is required simply to absorb the monthly population increase. The reduction in the nation’s unemployment rate is due to a drop in the labor-participation rate. That means the number of people in the nation’s workforce declined as many long-term unemployed ceased searching for jobs, having become frustrated with their inability to find full-time employment.

Some elementary math illustrates Bastiat’s point. What is seen (and reported) by the media is a simple ratio, i.e., 8.3 percent. What is not seen is how that unemployment ratio, known as the “U3” rate, is constructed by the BLS. What should be seen is that as frustrated people leave the workforce, both the numerator and the denominator, the quotient of which is the unemployment ratio, change.

Here is a simple example: Suppose that there are one hundred people in the workforce, and ten of the one hundred are looking for work. The numerator (i.e., those unemployed and looking for work) is ten; the denominator is one hundred. Ten divided by one hundred results in an unemployment rate of 10 percent. What if one of the ten unemployed becomes frustrated with his or her inability to find work and leaves the workforce? The numerator is reduced to nine, as only nine people are counted by the BLS as unemployed. The denominator also goes down by one, to ninety-nine. Now the ratio is nine divided by ninety-nine, resulting in an official unemployment rate of 9.1 percent. Strike up the band! But no net jobs were created. The only creation was the false impression of progress on the employment front.

Where are the jobs?

What also is striking about the January 2012 statistics is the industries in which those 243,000 jobs were added. A substantial portion of the jobs created were in the domestic-oil and natural-gas exploration and production sectors. Oil production in North Dakota and natural-gas production in Pennsylvania and West Virginia are rapidly converting the United States into a potentially energy-independent nation. In fact, BLS statistics, which unsurprisingly cannot be found in mainstream media reporting, demonstrate that while the total U.S. workforce has diminished by over 4 percent since 2007 (i.e., a lower labor-participation rate, despite increased population), employment in the oil and gas sector has increased by more than 21 percent.

Barring an intervention like the Obama administration’s decision to stall the Keystone XL pipeline, oil and gas drilling, production and transportation jobs will continue to multiply as shale areas in Texas, Arkansas and Louisiana sprout more gas wells. These oil and gas jobs are the antithesis of what Obama really wants. But they are what increasingly will be seen, while Obama-subsidized alternative energy companies, such as Solyndra, Ener1 and Beacon Power, collapse into bankruptcy and become not seen.

Jay Zawatsky is the CEO of havePower, LLC (a natural gas infrastructure developer) and a professor of business in the dual degree MBA program of the University of Maryland University College.