How Unemployment Rates Can Exaggerate States' Recovery

Politicians have been touting their states' low jobless rates as proof that they've bounced back from the recession. But unemployment only tells part of the story.
by | October 16, 2015
People standing in line for a job fair. (AP/Lynne Sladky)

From a quick glance at state unemployment rates, one might assume that the economic recovery is churning right along.

Most states’ rates have fallen significantly over recent months, and last month saw 20 states posting their lowest rates since at least 2008. In three states, the August unemployment rate dropped to the lowest levels since 2001: Michigan (5.1 percent), Ohio (4.7 percent) and Texas (4.1 percent). Top elected officials in different states have been touting their low jobless rates, accordingly (see here, here and here).

Yet the often-cited unemployment rates don’t tell the whole story of how state economies are recovering. Most notably, the measure doesn’t consider workers who, for various reasons, have dropped out of the labor force.

As the unemployment rate has fallen, a sharp contrast has emerged between it and other indicators assessing the labor market. To show these differences, we’ve compiled historical data for each state’s unemployment rate, labor force participation rate and employment-to-population ratio. (View the data below.)

Collectively, the latest monthly estimates from the U.S. Department of Labor indicate that most states still have a long way to go for a full recovery. Since the start of the recession, about half of states now report unemployment rates that are either lower than or nearly equal to where they were at the start of the recession. But employment-to-population ratios -- which consider all people, regardless of whether they’re looking for a job -- are still down in every state, with the decline ranging from -1.1 to -7.4 percentage points since the beginning of the recession.

Consider Colorado, where the current unemployment rate is about where it was at the start of the recession. Since then, its employment-to-population ratio has dipped from 72.5 percent at the start of the recession to 66.5 percent in August. Similarly, while Kentucky has recorded a slight decline in the unemployment rate, its employment-to-population ratio has dipped 4.7 percentage points.

David Cooper, a senior economic analyst at the Employment Policy Institute, said improvements in unemployment rates are overstating the health of the labor market. “These folks have been unable to find jobs, and a lot have retired early or are finding alternative ways to support themselves,” he said.

Many younger workers or people who were laid off went back to school to bolster their job prospects, but trying to wait out the labor market hasn’t worked out for many of them.

This doesn’t mean that the unemployment rate isn’t important. The employment-to-population ratio is also limited becuase it doesn’t consider demographic changes. Part of the decline in the ratio is attributable to the aging of the workforce, particularly baby boomers who are retiring.

The single best measure, according to Cooper, is the employment-to-population ratio for those of prime working age (ages 25 to 54), which is currently at 77.2 percent nationally. While this ratio has rebounded somewhat after bottoming out at 75 percent, it remains well below the 80 percent it reached in the months before the recession.

Ratio

In fact, as we’ve shown previously, the only age group whose employment-to-population ratio has recovered is for those ages 55 and over, since Americans are now working later into their careers.

The Labor Department doesn't publish monthly employment-to-population ratios by age group for states, but these can be calculated from annual figures. This table compares the age 25-to-54 employment-to-population ratio for each state between 2007 and 2014:

SOURCE: Author's calculations of BLS annual averages for age 25-54 civilian population. Totals may not add due to rounding.

New Mexico recorded the largest percentage-point decline in its working-age employment-to-population ratio (-8.1), followed by Nevada (-6.2) and Washington (-5.5).

A few other states have been performing fairly well over the course of the economic recovery. Minnesota is the only state with an annual ratio (85.5 percent) that’s not below pre-recession levels. Similarly, Massachusetts’ ratio of 79.9 percent is also one of the nation’s highest and hasn’t fallen much.

State Labor Market Data

While unemployment rates have declined, states' employment-to-population ratios and labor force participation rates haven't yet recovered. Select a state to view changes in these measures over time.