The soaring labor market under President Trump has President Obama’s defenders arguing that his administration is largely responsible. For example, in May, MSNBC ran an article claiming that with respect to the decline in the unemployment rate, “Trump was born on third base” and “thinks he hit a triple.” Why? Because the “jobless rate has been steadily declining since President Obama ended the Great Recession in his first term.”
That whole argument comes close to gaslighting. Yes, the recession ended in June of 2009, five months into Obama’s term, and the unemployment rate has been declining since October of that year, when it peaked at 10 percent. But why did it decline during the Obama years?
For most of his presidency, Obama benefitted from a steep decline in the percentage of the population working or actively looking for work, which is known as the “labor participation rate.” That’s no small matter.
Our government doesn’t count people as unemployed if they aren’t looking for work. For example, if there were 100 people in the labor force and 10 were unemployed and looking for work, the unemployment rate would be 10 percent. If five of those people stopped looking for work and therefore dropped out of the labor force, the unemployment rate would decline to 5 percent, even though no one actually gained employment.
A decline in the unemployment rate due to people dropping out of the labor force is not evidence of economic strength. In fact, if people are leaving the labor force because they can’t find a job, it’s a sign of weakness. On the other hand, reducing the unemployment rate while labor participation is either stable or increasing means the economy is growing and creating jobs.
When unemployment peaked at 10 percent in October of 2009, the labor participation rate was 65 percent. When Obama left office in January of 2017, unemployment had declined to 4.8 percent primarily because labor participation had declined to 62.9 percent. Had labor participation stayed at 65 percent, the unemployment rate would have been 7.9 percent when Obama left office.
In other words, unemployment went down during the Obama years mostly because people stopped looking for jobs, not because they found them. Of the 5.2 percentage point decline in the unemployment rate (from its 10 percent peak to 4.8 percent), 3.1 percentage points – or about three-fifths – was due to a decline in labor participation. If that decline had not happened, the unemployment rate when Obama left office would have been higher than the 7.8 percent rate he inherited when he took office.
So much for the claim that Obama is responsible for the strong labor market.
President Trump inherited a 4.8 percent unemployment rate and 62.9 percent participation rate. While the unemployment rate has declined to 3.7 percent in each of the last three months – a low last seen in 1969 – the labor participation rate has stabilized and was 62.9 percent in November.
In other words, in Trump’s first 22 months, the unemployment rate has declined 1.1 percentage points to nearly a 50 year low with no concurrent decline in labor participation. The entire decrease has been due to actual job growth in a strengthening economy, rather than people dropping out of the labor force in a stagnant economy.
The numbers are actually even better than they look. Job openings have also increased from about 900 per month in President Obama’s last 21 months to an astounding 78,000 per month under President Trump. That bodes well for an increase in labor participation over time as the Bureau of Labor Statistics (BLS) has reported that in every month since March, there has been more job openings than people unemployed – the first time that’s happened even in a single month since BLS began reporting the data in 2000.
In addition, the Wells Fargo/Gallup Small Business Index reported just this month that optimism among small-business owners has been increasing throughout 2018 to a level higher than at any point in the Index’s 15-year history.
That’s great news for workers. With unemployment low because optimistic businesses are actually hiring more people and creating new job openings, employers are competing for employees, driving wages higher at a pace not seen in nearly a decade.
The BLS recently reported that in both October and November wages for American workers were up 3.1 percent over the prior year, the largest gains since April 2009. Workers are earning more, they’re taking home more of what they earn because of the Republican tax cuts, and they’re spending it as consumer confidence surges driving more economic growth.
These numbers reflect the benefits that flow when the unemployment rate declines because more people are working, rather than because they’re dropping out of the labor force. It’s what happens when government gets out of the way by cutting taxes, slashing regulations, and encouraging domestic energy production.
For American workers, that’s an economic home run.