Easy On The Unemployment Rate Rejoicing

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THE STASH AUGUST 7, 2009

Easy On The Unemployment Rate Rejoicing

Yes, it's heartening that the rate of job destruction slowed significantly in July--only 247,000 lost non-farm jobs versus 443,000 in June. The labor market does appear to be stabilizing. Still, the unemployment rate itself, despite the drop from 9.5 to 9.4 percent last month, is definitely going to get worse before it gets much better.

Consider what actually happened last month: The number of unemployed people dropped by 267,000 while the overall employment number (as opposed to non-farm employment, which is the most typically cited number) dropped by 155,000. Which is to say, those 267,000 no-longer-unemployed people didn't get jobs. They dropped out of the labor force altogether. In fact, the entire drop in the unemployment rate can be explained by the fact that previously unemployed people stopped doing the things they need to do (namely, look for jobs) to be counted as part of the labor force.

In June, by contrast, not only did we lose more jobs, but the number of people who dropped out of the labor force was much lower. That means a higher fraction of people without jobs were counted as unemployed.  

I did a back-of-the-envelope calculation to get a sense of how important this phenomenon was in explaining the unemployment rate. Basically, if you take the percentage of people who left the labor force in June (.1 percent) and applied it to July (for which the actual percentage was .27 percent), the unemployment rate would have actually ticked up slightly, to about 9.52 percent from about 9.51 percent. So, as I say, nothing to get excited about, unemployment-rate-wise.

Worse, as the economy improves over the next six months to a year, my guess is that two things will happen: 1.) We still won't be creating jobs, at least not quickly enough to accommodate all the people graduating from high school and college. 2.) All those people who left the labor force because they got fed up looking for work will rejoin it as their confidence rises. Which is to say, all the unemployed people who aren't technically considered unemployed today will start showing up in the labor department numbers all over again, and the unemployment rate will rise for a given level of joblessness. It's going to be incredibly difficult to avoid that 10 percent threshold.

--Noam Scheiber

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