Bad News: Unemployment Keeps Falling  

Yes, you read that right, but how can falling unemployment be bad? It all depends on WHY it is falling. When the unemployment rate fell from 9.4% to 9.0% in January 2011 it looked like we were finally headed in the right direction. But a closer look at the numbers revealed that this decrease was primarily due to workers dropping out of the labor force. When the unemployment rate falls at the same time the labor force participation rate falls and few jobs are created, we have a problem.   

Here is why: Let's say that there are 100 people in the labor force and 5 of these people are unemployed. This means that the unemployment rate is 5/100 = 5%. Now, let's say that Bob (one of the five unemployed) gets tired of looking for a job. After months of no success he gives up. Since Bob is no longer looking for work, he is no longer part of the labor force and therefore no longer included in the unemployment statistics. What happens to the unemployment rate now that Bob has stopped looking? IT FALLS! Now, the labor force has only 99 participants and 4 of them are unemployed. The unemployment rate is now 4/99 = 4.04%. Thanks to Bob getting discouraged, the unemployment rate falls from 5% to 4.04%. Let's party!  

Unfortunately, discouraged workers have been a major reason why unemployment has been falling the last couple of years (retiring baby boomers and students staying in school to avoid the soft labor market have also contributed). A lot of "Bob's" stopped looking for work which has created the illusion that things are getting better. Back in March, for example, 496,000 people stopped looking for work which brought the labor force participation rate to its lowest level since 1979. This caused the unemployment rate to fall from 7.7 to 7.6%. However, if labor force participation had remained constant, unemployment would have increased to 7.9% instead. And now we have the August report showing what appears to be the good news of unemployment falling to 7.3%. Unfortunately, this is because labor force participation has now fallen to its lowest level since 1978 (35 years!)  

Add back all those who have dropped out of the workforce since 2008 and unemployment would stand at over 11%. (If you are a Barack Obama fan, thank a discouraged worker. It is highly doubtful he could have been reelected with an unemployment rate that high).  

We need 100,000 to 125,000 new jobs created each month to stay even with population growth and about 300,000 per month to bring about any meaningful improvement. So far this year, monthly job creation has averaged only 180,000.

For unemployment rates, see:

http://data.bls.gov/PDQ/servlet/SurveyOutputServlet?series_id=LNS14000000

For labor force participation rates, see:

http://data.bls.gov/timeseries/LNS11300000/

For monthly job creation, see

http://data.bls.gov/timeseries/CES0000000001?output_view=net_1mth

Also see July 10th: Why is the Economy Stuck in Second Gear?

MM