The Doctor Is In: The Unemployment Rate and Reality

Columbus Chamber
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Today the Bureau of Labor Statistics released initial estimates of U.S. employment and unemployment for May (actually the second week in May).  As usual, the headlines are focusing on a single number, the unemployment rate, which rose to 9.4 percent from 8.9 percent in April.  This is a very easy number to communicate and fits well into a headline.  But for a couple of reasons, the unemployment rate is not the best gauge of the status of the economy, either nationally or locally.

For one thing, changes in the unemployment rate are driven both by changes in employment and changes in the labor force – equivalently, the number of people working and the number of people looking for work.  This latter number is defined in a very specific way: you are looking for work – and in the labor force – if you have actively sought employment within the last 30 days.  If you have not, you are not counted at all.  (These totals are estimated from a monthly survey of households called the Current Population Survey.)  In reality, being available for work is not a yes-no question; it is a more-or-less question.  For this reason, the labor force fluctuates from month to month as people who do not work steadily step up or step down their job search.  This can cause some odd results.  In April, the number of people looking for work jumped, leading to the largest monthly percentage increase in the labor force since November 2007.  This caused a fairly big increase in the unemployment rate (8.5 percent to 8.9 percent) even though the estimated number of people working actually increased slightly.  In May, the number of people fell back somewhat while the labor force increased again, producing the unemployment rate increase to 9.4 percent.

Just the opposite can happen as well.  The initial estimates for the Columbus region during mid-2003, as the labor market was bottoming out after the last recession, showed employment and labor force both declining.  But because the labor force was falling faster than employment, the unemployment rate was declining.  People were asking me, “The unemployment rate is falling at last.  Isn’t this great?”  My reply was, “Well, no.”  Actually, this is the worst of all possible worlds: jobs were declining and workers were expecting not to find work, so they were not even looking.  Conversely, the increases in labor force we have seen during the past three months are a sign that workers may be expecting jobs to be easier to come by during the summer.  Thus, the unemployment rate increases aren’t quite as bad as they seem.

That leads to the second problem with the unemployment rate: it understates the pain as the economy worsens.  As jobs disappear, people stop looking for them, which puts downward pressure on labor force and the unemployment rate.  Thus, the unemployment rate increases less in a recession than it would if the number of discouraged workers weren’t increasing.  If people hadn’t dropped out of the labor force over the course of the current recession, the May unemployment rate would have been an even 10 percent.

A much better labor market indicator is the total number of jobs (nonfarm payroll employment).  This declined in May by “only” 345,000 – half the 700,000-job pace between December and March and the smallest decline since last September.  It is hard to imagine the disappearance of 345,000 jobs being good news, but that is a sign of the current times.

We will get local payroll employment estimates for May in two weeks, but thus far we are weathering the recession fairly well.  From the beginning of the recession through April, U.S. employment fell 4.2 percent, while Columbus region employment fell 2.1 percent – again, good news only in context.