Why exactly did the unemployment rate fall?

Friday, August 7, 2009

Please correct me if I'm wrong.

But the labor force is really big, 154,503,000 (see Table A on the BLS news release).

Compared to that, the number of unemployed is really small, 14,462 (see the same table).

If the decline in number of unemployed, -267,000 was 63% the size of the decline in the labor force, -422, which shift is the dominant factor in the falling unemployment rate?

Unemployment rate = unemployed/labor force

I'd say the sizable shift in the really small numerator. Apparently, the AP does not think so:
One of the reasons the rate went down, however, was because hundreds
of thousands of people left the labor force
. Fewer people, though, did
report being unemployed.

I'm pretty sure that this should read: The main reason that the unemployment rate went down was due to the number of unemployed falling significantly as workers left the labor force.

Rebecca Wilder


Irrational Doomsday Blog August 7, 2009 at 12:10 PM  

The math is right, but I disagree on that analysis.

The numerator is indeed the more significant factor, so the unemployment number has more to do with why the rate went down.

But I think exhaustion is the main reason the unemployment number is decreasing, which I think is indicated by the exhaustion rate and the fact that we are still losing jobs by all measures.

My economy in June
100 person workforce
10 people are unemployed
Unemployment rate = 10%

My economy in July, one person runs out of unemployment benefits
98 person workforce (-2 ~twice as much as the unemployment loss, just like in the real world)
9 people are unemployed (-1)
Unemployment rate= 9.2%

The unemployment rate dropped because the drop in the number of unemployed was the more dominant factor, like you describe.

But the description of why that happened is more full if you consider exhaustion- in other words, I'd say the best description of all would be that the unemployment rate is dropping *because* the number of unemployed is going down *because* people are leaving the work force. At least that's what appears to be the dominant factor to me.

fajensen August 8, 2009 at 4:34 AM  

Precisely, this is where the unemployed go when the statistics need mending: Food Stamps!

Gulp! I Say: 10 percent of the entire US population on food stamps - it is an achievement (of sorts) only matched by the most socialist European countries (where you still get actual money from the state once you are written off). Bet the stock "market" rallied over it too ;-)

I think I need some more SPX puts for my pension ...


WASHINGTON (Reuters) - For the first time, more than 34 million Americans received food stamps in May, the government said on Thursday, another symptom of the longest and one of the deepest recessions since the Great Depression.

Ken Houghton August 12, 2009 at 10:45 AM  

Iirc, and I'm fairly certain I do, just running out of UI benefits does not drop you from the workforce. (My recollection appears to be correct: "Discouraged workers are persons not currently looking for work because they believe no jobs are available for them." And that specifically excludes those who have "not searched for work in the 4 weeks preceding the survey for reasons such as school attendance or family responsibilities.")

You have to specifically indicate that, even without UI benefits, you are not actively searching for a job. Which is why all of those economic models that focus on UI benefits tell a story no one in their right mind would believe.

This is why a lot of us are paying more attention to U6 than the headline number. Or, if you want the 30,000 foot level, civilian employment/population ratio (which either stayed roughly the same on an unadjusted Basis [LNU01300000] or dropped 0.2% on a Seasonally Adjusted basis (which, given the size of the numbers, is rather significant on a "starfish" basis; series LNS11300000).

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