Labor force shouldn't be shrinking

Published September 23, 2021

By John Hood

North Carolina’s economy has enjoyed a substantial recovery from the depths of the Great Suppression — that is, from the COVID-19 downturn of 2020. Most businesses are back up and operating. So are schools and universities. More employees than ever before are working from home. That’s had positive consequences for worker satisfaction and traffic congestion (although the consequences for productivity are admittedly unclear). State government is flush with revenue. North Carolina’s headline unemployment rate was just 4.3% in August.

Lurking beneath these positive trends are some trouble signs, however. Perhaps the most obvious is what the headline unemployment rate, called the U-3 rate, doesn’t measure.

The U-3 rate is a fraction for which the numerator is the number of people who tell the Bureau of Labor Statistics they are unemployed and actively looking for a job. The denominator is the number of people working plus the number of people who are jobless but actively looking.

Notice that if you aren’t working and you aren’t actively looking for a job — because you’ve given up in frustration, at least temporarily, or you’re in the middle of a life change such as relocation or taking care of an elderly relative — you aren’t counted as “unemployed” in the headline rate. Furthermore, if you’re working part-time but would rather be working full-time, you aren’t employed to your full potential or preference. You’re underemployed. For the purposes of U-3, however, you are simply counted as “employed.”

All states have sizable shares of disaffected, transitional, and involuntarily part-time workers. While the U-3 rate doesn’t measure those shares, the federal government captures that information in other ways. North Carolinians would be well-advised to look beyond the headline unemployment rate that draws the most media attention each month, and supplement their understanding of North Carolina’s labor market by looking at other measures.

For example, the government computes a statistic called labor-force participation. What share of potential workers are either employed or actively looking? In August, that rate for North Carolina was 59.2%. Unfortunately, our labor-force participation is down from 60.1% at the beginning of 2021. That’s larger than the drop so far this year in Virginia (.3%). In Tennessee, there’s been no net change. In Georgia, Florida, and South Carolina, participation in the labor force has gone up during 2021, not down. This is a case where North Carolina sticks out like a very sore thumb.

Here’s another trouble sign. The Bureau of Labor Statistics publishes broader unemployment measures, consisting of 12-month rolling averages updated every quarter. These broader measures include the unemployed and underemployed workers the U-3 rate leaves out. As of June, that broadest measure for North Carolina, the U-6 rate, was 10.3%. That’s higher than the U-6 rates in most Southeastern states (although Florida, at 12%, has the highest U-6 rate of all, reflecting its particular vulnerability to sectoral downturns in tourism and recreation).

As you’ve been reading this column so far, your mind may well have jumped ahead to consider policy implications. I don’t blame you — I’m especially prone to this temptation, given how long I spent as the leader of a public policy think tank, the John Locke Foundation.

To observe that these labor-market signals are troubling is, however, not necessarily to establish partisan blame or advance someone’s talking points. Democratic activists think Republicans should have started spending the state’s revenue surplus more quickly, and massively. Republican activists think Gov. Roy Cooper’s COVID-19 restrictions were overly restrictive and continue to have lingering effects. The two sides disagree about the role of expanded unemployment-insurance payments in keeping workers on the sidelines of the labor market, and on many other potential explanations.

I have my own views about these matters, but the first step to staging an effective debate about remedies is to agree on the basic scope of the problem. Our headline unemployment doesn’t portray it adequately, given that some of its recent decline is the result of workers giving up, not workers finding jobs.

John Hood is a Carolina Journal columnist and author of the new novel Mountain Folk, a historical fantasy set during the American Revolution.