Is Michigan’s Low Unemployment Rate Misleading?

By Martin Lavelle

In a blog entry last year, I investigated the tightness of Michigan’s labor market after the state’s unemployment rate had reached its lowest point since 2001. More recently, in June 2017, Michigan’s unemployment rate achieved yet a new low during the current expansionary cycle, falling to 3.8%. The summer of 2000 is the last time Michigan’s unemployment rate fell below 4%. How does Michigan’s current labor market compare with that of 2000?

Analysis of Michigan Household Survey Data

Among popular labor market indicators, the unemployment rate is far and away the most recognized.(1) The unemployment rate is calculated by dividing the number of working age unemployed persons by the total labor force (i.e., unemployed plus employed). These readings of the total labor force are determined from the “household survey” (more details here). For one to be included in the labor force, one has to be 16 years or older and either employed or actively seeking employment.

So this excludes working age adults who are neither employed nor unemployed. This is why when we assess labor market conditions; we often look at the labor force participation rate. The labor force participation rate (LFPR) is measured by dividing the total labor force (employed plus unemployed) by the working-age population. Generally, a high or rising LFPR indicates a more robust labor market. At first blush, one might expect that an improving labor market would raise employment, lower unemployment, and grow the labor force, thereby decreasing the unemployment rate and increasing the labor force participation rate. But it is also possible for these two prominent indicators to move in opposite directions. As one example, if employment remained constant or slightly decreased, but unemployment fell at a slightly faster pace (so that the labor force contracted), the unemployment rate would decrease, a positive indicator, while the labor force participation rate would also decrease, a negative indicator.

As it turns out, these conditions have prevailed in Michigan. The chart below compares household employment and labor force levels going back to 2000.

Chart 1: Michigan Household Employment & Total Labor Force, Index: Aug. 2000=100: 2000-present

Source: Author’s calculations using data from the Bureau of Labor Statistics.

As we can see, both Michigan household employment and the state’s labor force are roughly 6% below summer 2000 levels. Except for a brief period in early 2001, Michigan’s labor force levels haven’t exceeded summer 2000 levels. In addition, while household employment is well above the lows hit during the Great Recession, only recently has the level of Michigan’s labor force recovered to recessionary lows, which occurred in September 2008.

Further, the next chart examines the level of unemployment and the labor force in Michigan back to 2000.

Chart 2: Michigan Household Unemployment & Total Labor Force, Index: Aug. 2000=100: 2000-present

Source: Author’s calculations using data from the Bureau of Labor Statistics.

Unemployment peaked in Michigan at the trough of the Great Recession in June 2009.(2) At that time, Michigan’s unemployment levels had almost quadrupled since August, 2000. Only by June 2017 did total unemployment in Michigan fall below its August 2000 level.

Since June 2009, while household employment increased almost 10%, unemployment dropped 75%. With the labor force staying relatively flat, Michigan’s labor force participation rate has fallen since the end of the Great Recession, from 63.8% to 61.4% presently, as shown in the next chart.

Chart 3: Michigan and U.S. Labor Force Participation Rates: 2000-present

Source: Haver Analytics.

Conclusion

Whereas Michigan’s unemployment rate is now recorded at its lowest since the summer of 2000, other labor market measures compiled through the household survey indicate Michigan’s labor market has not recovered to its 2000 condition. In August 2000, when Michigan’s unemployment rate last reached 3.8%, the state’s labor force participation rate reached 68.5% compared with 61.4% today. Why has the state’s labor force participation rate fallen so far? Some of it is demographics—an aging population. The national LFPR has also fallen for this reason, from 67.3% in January 2000 to 62.9% today.(3) However, Michigan’s falling LFPR also reflects more troubling developments, such as the loss of manufacturing jobs and the movement of working age population to other states. Michigan has 286,300 fewer manufacturing jobs now versus July 2000, helping to prompt the migration of almost 800,000 Michigan residents to other states since 2000. Accordingly, despite its low unemployment rate, it will most likely be some time before Michigan’s labor market will reclaim the level of health it recorded during the summer of 2000.

1-The unemployment rate that is referred to throughout the blog is the U-3 unemployment rate. The Bureau of Labor Statistics reports on other unemployment rates. See https://www.bls.gov/opub/btn/archive/the-unemployment-rate-and-beyond-alternative-measures-of-labor-underutilization.pdf for alternative measures of the unemployment rate.
2-See http://www.nber.org/cycles.html.
3- See https://www.chicagofed.org/~/media/publications/economic-perspectives/2014/4q2014-part1-aaronson-etal-pdf.pdf.