Unemployment Rate Not as Rosy as It Appears

The days of Michigan leading the nation in the unemployment rate appear to be in the rear view mirror.

Michigan’s unemployment rate of 9.3 percent in December ranks it 11th highest in the nation. The state's unemployment rate was 11.2 percent just four months earlier.

But a big reason for the state’s rosier outlook is a large drop in the state’s labor force, something University of Michigan economist Don Grimes calls “one of the least understood results” of the economic recovery.

Michigan’s workforce has dropped from 5.1 million in January 2006 to 4.6 million in December 2011. Michigan added 13,000 jobs in December of 2011, but the labor force decreased by 11,705 jobs.

“The labor force and employment are moving in opposite directions and that’s strange,” said James Hohman, a fiscal policy analyst with the Mackinac Center for Public Policy.

Hohman estimates that if Michigan had maintained the same number of people in the workforce as December 2007, and if all of the labor force drop-outs were instead classified as unemployed, Michigan’s unemployment rate would be at 16 percent.

Most experts are not quite sure why the state’s labor force has decreased.

Some of the reasons include “discouraged workers,” or a person who was once actively searching for a job but stopped due to lack of success. There also are more people retiring or more stay-at-home moms and dads. And there are more people leaving the state.

Grimes also pointed to two other possible factors — an increase in what he calls “the underground economy” — or workers who are not reporting income to the IRS and not admitting they are employed.

“If someone — for example a former construction worker — is not reporting their income to the tax authorities they are not going to tell some census employee that they are working, and they are not going to fit the test to determine if they are ‘unemployed,' which requires that they are actively searching for, and available to start a new job,” Grimes wrote in an email. “Thus they end up being counted as out of the labor force. But the truth is nobody really knows what is going on here.”

Grimes also wondered if a national trend could also be playing a part. That trend saw some long-time unemployed workers whose benefits were running out move to filing for disability with Social Security. 

“Nobody knows if the labor force is going to continue to decline like this or rebound as people return to work,” Grimes said.

At a November conference, Grimes said economists ran an experiment and held the labor force constant over 2012 and 2013 — negating the current declining trend — and found the unemployment rate was 1 percent lower than it would have been by the end of 2013.

“If the labor force shrinks, the drop in the unemployment rate will be even greater,” Grimes said. “So we could run into a problem of relatively low unemployment rates, where firms are having a very hard time finding qualified workers much sooner than expected. But, since a lot of these labor force dropouts will not have any income (or much less income) our prosperity will be much lower than the unemployment rate would indicate.”