Monday, March 10, 2008

Conflicting Employment Figures

The government's monthly survey of businesses indicates that payrolls experienced a net drop of 63,000 jobs during February. At the same time, numbers from the government's monthly survey of households indicated that the unemployment rate declined from 4.9% in January to 4.8% in February. How can the unemployment rate fall even as the economy sheds jobs? Understanding this paradox requires a closer look at the household survey numbers for the past two months.

* Numbers in thousands

The household survey indicates that the number of employed persons saw a net decline between January and February. The ranks of the employed thinned by about 255,000 people. Normally, the net drop in the number of employed people would cause the ranks of the unemployed to swell by a similar amount. The government considers a person unemployed if she lacks a job but has actively searched for one in the past four weeks. Yet, the pool of unemployed workers actually shrank by about 195,000 people between January and February. The change in the size of the labor force over the same period provides some clues as to why.

The number of people dropping out of the labor force in February exceeded the number of new entrants—on net about 450,000 people left the labor force. These people either left jobs with no intent of finding another or gave up on their employment searches altogether. If you want a job but you're so frustrated with past failures to find one that you stop looking, the government classifies you as a discouraged worker and no longer considers you to be part of the labor force.

All things being equal, February's employment drop of 255,000 should have increased the pool of unemployed workers from 7.58 million to 7.83 million. Things weren't equal though, as a number of people considered unemployed in January gave up on their job searches in February, contributing to the 450,000 person drop in the size of the labor force and causing the number of unemployed workers to come in at 7.38 million in February rather than 7.58 million. If we assume that all 450,000 people became discouraged workers in February, the drop in the ranks of the unemployed and, consequently, the labor force, reflects the inability of those out of work to find compatible job vacancies.

The unemployment rate is simply the ratio of unemployed people to the size of the labor force (unemployed / labor force). Since the ranks of the unemployed declined by 2.6% and the size of the labor force declined by only 0.3%, the fraction of the labor force considered unemployed declined from 4.9% in January (7,576 / 153,824) to 4.8% in February (7,381 / 153,374). In this peculiar case, the small drop in the unemployment rate reflects economic weakness rather than economic strength.

Discussion Questions

1. Here's what the employment numbers for February would have looked liked if the 450,000 people who left the labor force had remained in the labor force as jobless workers actively searching for employment (unemployed people):

* Numbers in thousands

Under these conditions, what would the unemployment rate have been for the month of February 2008?

2. You can find the Bureau of Labor Statistic's (BLS) news release for February 2008 here. The national unemployment rate is at best a rough gauge of joblessness in the United States. The February numbers illustrate how the unemployment rate can paint a misleading picture of labor market strength. A fuller understanding of labor market issues requires a closer look at employment figures. How do the unemployment rates for specific age and racial groups differ from the national rate?

3. According to the BLS, who are the people who “work part time for economic reasons”? What has happened to their numbers over the past year? Does the unemployment rate capture changes in the number of folks who work part time for economic reasons?

4. Our assumption that all 450,000 people who left the labor force in February became discouraged workers is unrealistic. (Indeed, the BLS only counted a total of 396,000 discouraged workers in February.) Who, according to the BLS news release, is considered a “marginally attached worker”? Are all marginally attached workers also discouraged workers?

5. An unemployment rate of just below 5% is still relatively low by historical standards. Nonetheless, tepid employment reports in January and February darken the U.S. economic outlook when considered along side reports of weak output growth and continuing turmoil in housing and financial markets. Keeping in mind that the Fed's recent rate cuts and the government's tax rebates will begin to impact the economy in May and June, what type of economic performance do you expect in the United States for 2008?

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