That amazing low unemployment rate

You can see why Donald Trump makes a big deal of the unemployment rate. At 3.5 percent, it's at a 50-year low. Despite some caveats, that's impressive.

But when you think about it (and thinking is what this blog is all about), the unemployment rate is the economic statistic for which the president is least able to legitimately take credit. And that's saying something, because presidents generally take too much credit, and get too much blame, for happenings in the economy.

Lucky for Trump, most people don't think about it. If they did, they would see that the president has to share that low unemployment rate with his predecessors. In fact, there's a very strong sense in which a lot more credit goes to them (including Obama) than to Trump. This is quite easy to understand.

You see, the unemployment rate is actually a cumulative statistic, in that it takes into account all employed workers in the economy in its calculation. Most of those workers got their jobs under previous presidents, not under Trump.

It's helpful to understand that the unemployment rate is defined as the percentage of unemployed workers in the labor force. The labor force is defined as all persons who are able and willing to work; that is, persons who are either employed or who want to be employed. (Persons who are not employed, and who choose to not look for a job, aren't considered to be in the labor force. Plenty of  persons are more or less voluntarily unemployed. We don't count them in the unemployment rate.)

So, the unemployment rate is defined as:

unemployed workers / labor force

This is algebraically identical to: 

unemployed workers / (employed workers + unemployed workers)

Both the numerator and denominator affect the rate. A small numerator results in a lower rate, as does a large denominator.

For present purposes, we will assume that the denominator remains constant, although it actually doesn't due to factors such as population growth and the participation rate, which we will ignore here for simplicity.

With a constant denominator (which is to say a constant labor force), unemployed workers and employed workers change by the same amount in opposite directions as jobs are lost or created in the economy.

So the effort to reduce the unemployment rate consists of transitioning unemployed workers to employed workers, and minimizing the transition of employed workers to unemployed workers.

Which is to say, maximizing employed workers.

But notice that employed workers is a cumulative quantity. Some of those employed workers in the unemployment rate calculation hold jobs created under the current president. But many more of them hold jobs created under previous presidents.

And for purposes of calculating the unemployment rate, all jobs count equally. It doesn't matter a bit in what order they occurred.

Trump wants all the credit for the low unemployment rate, but in fact the rate contains far more employed workers (the quantity we want to maximize) holding jobs created under Obama than under Trump.

Obama created more than 15 million jobs since the last month of negative jobs growth of his presidency, which was September 2010. Combining jobs created and jobs lost, Obama created a net 11.6 million jobs over his presidency.

(Don't forget: At the time of Obama's first inauguration the economy had been in recession for 14 months, and was losing almost 800,000 jobs per month. So Obama began in a deep ditch. On the other hand, many of those lost jobs would presumably come back as the economy healed. A partisan can spin this in any direction he wants.)

Trump has created around 6.6 million jobs so far. Because he inherited an economy that had been expanding for many years when he took office, and because that expansion has continued, Trump has never experienced a month of negative job growth.

The total size of the labor force is presently 164 million. Total employed workers is far in excess of 150 million. The jobs created by Trump plus the jobs created by Obama account for a small fraction (a bit over 10 percent) of employed workers. All of those 150+ million workers figure into the unemployment rate calculation. So with respect to the unemployment rate, the contribution of employed workers by any one president is quite small. Trump has no special claim on the present historically low rate. He just happens to be in office toward the end (we presume) of a historically long economic expansion that as of this writing has gone on for an impressive 125 months. The large majority of those months were under his predecessor.

You can also intuit the cumulative nature of the unemployment rate by examining it graphically, over time.

It's interesting that Trump wants to hang his hat on the low unemployment rate, even though we've just seen that's not really appropriate. Surely it would be fine for him to take some credit for continuing the rate's long term decline at a pace almost as good as what he inherited, but that's not what he's doing. In the past I have said, somewhat facetiously, that we can give Trump credit for not screwing up Obama's economy. Though that's a deliberate poke at Trump, there's a lot of truth to it.

Although presidents claim too much credit, and get too much blame, if a president were to rightly want some credit on the employment front, perhaps it ought to be in the monthly jobs creation data. That, at least, happens entirely on his watch.

Alas, when we look at monthly jobs data, Trump substantially under-performs his predecessor. Over his 34 full months in office, Trump created an average of 193,000 jobs per month. And that includes the most recent, and unexpectedly strong, report of 266,000 jobs created in November. Over his final 34 months in office, Obama averaged 227,000 jobs created per month, which betters Trump by a whopping 34,000 jobs each and every month. I have previously shown that at no point in his presidency did Trump ever match Obama in jobs creation. And as I've said many times, you can do your own analysis, and check mine, by going to the authoritative Bureau of Labor Statistics site where the data is compiled. Look for the table near the bottom of the page.

Even in this we must be fair. Jobs are harder to come by the closer the economy is to full employment (which is also why the unemployment rate curve flattens toward the end). So we'd expect the pace of job creation to slow late in an economic expansion. But the difference between the two presidents in the jobs creation data was significant even early in the Trump presidency compared to late in the Obama presidency. (In other words, to similar, adjacent periods in the economy.) We can be charitable and say on balance Trump has done just fine, but that's not what he claims for himself. Rather, Trump says he's launched an economic miracle, the likes of which has never been seen, and that it's his unique accomplishment. Which is complete nonsense. Even GDP growth under Trump has been quite modest, and that's despite a large tax cut.

Finally, don't forget: During the presidential election, Trump was scathing in his criticism of Obama's economic performance and jobs creation, which Trump has been unable to match. All he can really do is claim the very low unemployment rate for himself, because none his other economics statistics are all that remarkable. But as we've seen, it isn't his to claim.  Even so, as long as most people don't understand why, he'll probably keep getting away with it.


Copyright (C) 2019 James Michael Brennan, All Rights Reserved

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