Here’s a post by reader Ken Melvin, tackling the issue of illegal immigrants and how it affects the official unemployment figures in the US:
E/P Ratio, Disappearing Americans, and Illegal Immigrants
In the beginning – a model. For this model, 80% of the current population of some 300 million are between 16 and 65, and some 70% of this 240 million, i.e., some 166 million, are available for work for which they are qualified that pays a decent wage. That is to say that, in the model, some 166 million of the current 300 million (US population November 2006) are in ‘the labor pool’ or ‘labor force’. If 150 million of the 166 million citizens are employed in 2006, then the remaining 16 million are unemployed. The ratio of this 150 million employed to the 240 million of the population between 16 and 65 years of age, 62.5%, is known as the employment to population ratio, E/P. The ratio of the 16 million unemployed to the 166 million people available for work as a percentage, 9.6%, is the percent of work force unemployed, or the rate of unemployment.
If someone can’t find work, after awhile they may look for work less often and after a greater while they may stop looking altogether. In the real world of labor statistics, such persons are dropped from both the unemployed and the ‘labor force’, i.e., they are dropped from both the numerator and denominator of the equation for calculating the unemployment level. This masks and distorts both increases and decreases in unemployment. As unemployment increases, discouraged job seekers are dropped from both the rolls of the unemployed and the rolls of those available for work lessening the increase in ‘official’ unemployment. Similarly, when employment increases, those who had given up looking for worked move back into the labor force.
The period from the mid 1990s to 2000 provides a good example of what occurs during a decrease in unemployment. During this time, the number of jobs added exceeded the population increase by a significant ratio for a period of some six years but unemployment only went down some 2%. The official unemployment rate in 1994 was 6.1%. If the available work force in 1994 was 145 million this 6.1% unemployment equates some 8.8 million unemployed persons. If the 1994 available work force was 145 million and the population grew at 1%/yr during the period, by 2000, one would expect the work force to be approximately 1.07 times 145 million or about 155 million.
Some 15 million jobs were added during this period from 1994 to 2000. Of these 15 million added jobs, some 10 million went to cover the increase in work force due population growth. Some 2.6 million of the remaining 5 million jobs went the change in the number of unemployment from 8.8 million in 1994 to 6.2 million in 2000. The remaining 2.4 million represent some portion of the work force that had been ‘disappeared’ prior 1994. This means that the actual number of unemployed in 1994 was at least 11.2 million (8.8 million plus 2.4 million), and the actual unemployment rate at least 7.7%. So, how much credence accord 2000’s 4% unemployment figure? Was 4% too low? If so, how much? Thus and so, the unemployed are disappeared during times of increasing unemployment only to reappear when job growth exceeds population growth.
But, the unemployed disappeared as above don’t disappear from the population, P, of the E/P ratio. The E of E/P (numerator) is the number employed, and the P of the E/P (denominator) is the portion of the total population within an age range. Thus it is that the current E/P ratio is low. The 2.2% difference between the E/Ps of 2000 and 2005 represents some 5 million disappeared unemployed (about the same number pulled in the gap from 2001 to 2004 that was never made up, see Chart 1 at , or an increase of some 3% in actual unemployment.
In October 2006, 4.7% was given as the official unemployment rate. At this time, payroll, from Chart 1: was some 135 million, yielding a labor force of some 142 million. The official E/P ratio of 62.5% suggests an ‘age group population’ of some 216 million. On these bases, the 4.7% unemployment rate equates some 7 million unemployed workers. In 2000, official unemployment was 4% and payroll 133 million, yielding a labor force of 138.5 million. And, the official E/P of 64.6% suggested a ‘population’ of some 206 million. During the six years, employment should have increased to some 141.3 million (1.07 x 133 – 0.007 x 142).
Note, adding the approximately 5 million ‘disappeared’ during the gap pulled from 2001 to 2004 spoken to above to 2006’s 135 million equals some 140 million, which is quite close to 141.3 million. And, for 2006, if we add the approximately 5 million ‘disappeared’ during the gap of 2001 to 2004 to both the 7.1 million of the numerator and the 142 million ‘labor force’ denominator, the unemployment rate for 2006 is some 8.2% [(12/147) x 100], which equates to some 12 million unemployed.
Similarly, if the labor force was 155 million in 2000 and increased by 1% a year to 166 million in 2006 but payroll employment only increased some 3 million from 2000 to 2006 there is a deficit of some 8 million jobs (166 – 155 – 3). The 1% increase in unemployment, from 4% in 2000 to 4.7% in 2006, accounts for less than 2 million of this deficit. The remaining more than 6 million deficit amounts to an additional some 3.6% unemployment which added to the official 4.7% equals a current actual unemployment of some 8.3% (3.6 + 4.7) meaning that there are more than 13.8 million unemployed.
Per the model, if employment is some 150 million and the E/P ratio some 62.5%, then the ‘population’ is some 240 million, the labor force is some 168 million, and there are some 18 million (168 – 150) unemployed workers for an actual unemployment rate of some 10.7%.
By most accounts, upwards of a million illegal workers have entered the US each year since 2000. It is generally accepted that more than 12 million are in residence. It is generally acknowledged that these illegal immigrant workers make up at least 5% of the US work force, i.e., at least 7.5 million of the some 150 million total jobs in 2006 were held by illegal workers. In other words, the real employment to population ration in 2006 is not 62.2%, [(150/240) x 100 = 62.2%], but rather it is some 59.4%, [(142.5/240) x 100 = 59.4%]. This also means that actual unemployment among legal US workers is greater than 9.5% [(7.5 + 8.3)/(166)] x 100.
Combining the effect of illegal workers with the disappeared; actual unemployment among legal US workers in 2006 is on the order of 12.5%, [(7.5 + 5 + 8.3)/166] x 100.
Beyond taking the jobs of millions of US citizens and other legal workers, illegal workers work for lower wages thus forcing down wages in those industries where they work. The effect of illegal workers on the economy is almost exactly the same as that of offshoring.
Finally, a distinction between illegal Chinese workers and those from Latin America: While illegal workers from Latin America take jobs normally held by US citizens, i.e., the displacement is direct; those from China tend to work exclusively for other Chinese as waiters, chefs, seamstresses, laborers, etc. The restaurants, shops, etc., where they work have such low prices that similar businesses with legal worker staffs simply can’t compete and are forced to close.