Introducing the RBS-DCI: What dry cleaners can tell us about the job market

Monday, December 8, 2014

Rutgers Business School launches new economic index to anticipate employment trends

December 8, 2014, NEWARK, NJ – Working together with Rutgers MBA students in his macroeconomics classes, Professor Farrokh Langdana, professor of finance and economics, and the director of the Rutgers Executive MBA program, devised a new economic index to get a better sense of whether people are working, looking for work, or have given up looking for work – the Rutgers Business School-Dry Cleaning Index (RBS-DCI).

"With the unemployment rate falling, my students were asking why people still felt so anxious about the economy and, in particular, the job market," said Langdana. "The unemployment rate is one of our most eagerly anticipated statistics, yet it is fraught with deficiencies and limitations."

Officially, the unemployment rate is the percentage of the Civilian Labor Force (CLF) that is unemployed. The CLF is the over-16 population minus any/all individuals not actively looking for work. "Hence, discouraged workers are excluded from the CLF and are missing from the official unemployment rate," said Langdana.

"As more and more workers simply give up looking for work and stop searching, the CLF drops. This confuses matters when, for instance, the unemployment rate falls from, say, 6.1 % to 5.9% (as in did in September, 2014). This may not necessarily mean that fewer workers are unemployed. If the denominator, the CLF, or the ‘size of the pie’ shrinks too, it then muddies the picture," explained Langdana.

Workers who have dropped out of the CLF are said to not be participating, so the "participation rate" is defined as a percentage of the over-16 population that constitutes the CLF. In fact, the participation rate in the US has dropped to February 1978 levels at the moment, a record low of 62.8% as of October, 2014, as the long-term unemployed simply have stopped looking for work.

U.S. Civilian Labor Force Participation Rate 1978-2014 

 

Source: U.S. Bureau of Labor Statistics (http://data.bls.gov/timeseries/LNS11300000)

"Given that the official unemployment rate does not capture the change in the denominator (the CLF) relative to the jobs created, a 'real-world' index that captures those who are working and those who may be making the transition back to work—back to joining the CLF—has been conspicuous by its absence. So we came up with the RBS-DCI," said Langdana.

Over 2,000 MBA students in the Full-Time, Flex, and Executive MBA programs surveyed their dry-cleaners to determine if the volume of shirts and blouses over the last 6 to 12 months had stayed the same, dropped, or increased. The logic is that if individuals are working or looking for work, the demand for the cleaning of shirts/blouses increases. The RBS-DCI index captures part of this elusive change in the "participation" rate.

An index of 50 indicates "no change" in the volume of the laundry of shirts and blouses, less than 50 indicates a slowdown, and greater than 50 indicates growth in the volume of shirts and blouses.  The RBS-DCI was found to be 62.5. The result: The RBS-DCI tells us that in New Jersey, a macroeconomic recovery, is under way.

"Though workers with home offices, and those that dress down, etc., are not captured, the index provides information that was not previously available, and it captures, to some extent, the mobility of workers back into the work force to look for work," said Langdana.

The RBS-DCI will be released every six months, with the next announcement due in June. For more information, visit business.rutgers.edu/faculty-research/rbs-dci. For more of Prof. Langdana’s macro blogs please visit business.Rutgers.edu/Langdanamacro, or follow him on twitter.com/FSCwithFarrokh.

- Daniel J. Stoll

TAGS: Business Insights Executive MBA Farrokh Langdana Full-Time MBA MBA Part-Time MBA Thought Leadership