OCTOBER 5, 2012
There seems to be a lot of skepticism about today’s solid employment report in certain corners of the Twitterverse. How is it that unemployment could fall a head-turning .3 percentage points—from 8.1 to 7.8 percent—when the economy added a mere 114,000 jobs last month?
There are a couple things to say in response. First, as people who follow this stuff know, the unemployment rate and the payroll numbers are calculated from two different surveys. The unemployment rate comes from a survey of households, the payroll (i.e., jobs) number from a survey of businesses. They don’t match up perfectly, and certainly not from month to month, since there’s often a lot of noise in any given survey. But they do tend to converge over time.
Which leads to the second point: Even though the numbers do come from different surveys, today’s report shows that the surveys are starting to tell us similar things, as the labor economist Betsey Stevenson points out. Namely, that the job market has been stronger than we thought in recent months. The drop in the unemployment rate speaks for itself. As for the payroll numbers, they were revised upward by at least 40,000 in both July and August. So it’s not like the trends are headed in different directions.
Finally, the reason that more informed skeptics (i.e., not Jack Welch) are probably surprised by today’s big drop in the unemployment rate is that, as the economy improves, the rate tends to rise a bit, or at least move sideways for a while, before eventually easing down. That’s because rising economic optimism encourages people who had dropped out of the labor force, and therefore aren’t counted in the standard unemployment measure, to get back into the labor force, where they boost the unemployment rate until they find a job. And, indeed, more people did join the labor force last month—a whopping 418,000, according to the household survey.
So how on earth did the unemployment rate still drop from 8.1 to 7.8 percent? That’s where the good news comes in. Even though those 418,000 people joined the labor force, which would normally increase the number of unemployed people and therefore the unemployment rate, the economy actually added a jaw-dropping 873,000 jobs, according to the same survey, for a net drop of 456,000 unemployed people. (There are some rounding issues here so the overall math is off by a 1,000 or so.)
Now, as I say, the household survey can be noisy—generally noisier than the business survey—so don’t interpret the numbers too literally. But the broad brushstrokes are very encouraging even if you set aside the specifics. They tell us we’re putting enough people back to work that we can bring down the unemployment rate even as hundreds of thousands of people start looking for jobs again and technically boost the ranks of the unemployed. Moreover, the household survey numbers have been strong for a while now (if not quite this strong), and it looks like the business survey numbers are starting to move in their direction, rather than vice versa.
If that trend continues—and I’ve certainly been skeptical in the past, and that’s even before you factor in that giant fiscal cliff we could fall off of—we could all be feeling pretty good in six months or a year.
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