Friday, May 4, 2012

Monthly Unemployment Rate Drops to 8.1% ... But Why?

The headline unemployment number released this morning dropped from 8.2% to 8.1% in April. On the surface this sounds like a good thing. But is it? Not really.

To discover why, let's review in summary form the unemployment rate calculation. Assume that we have a workforce of 100 persons and that 91 are employed. That means the unemployment rate is 9%.

Then assume that the nine persons who aren't working become discouraged or otherwise decide not to look for work. They drop out of the workforce.

Just like magic, the unemployment rate is now zero. That's because there are 91 persons now in the workforce and 91 are employed.

That's illustrative of what happened this past month. Why Did the Unemployment Rate Drop? describes the situation as follows:

"The U.S. unemployment rate dropped to 8.1% in April but a broader measure was unchanged at 14.5% and a separate survey noted that the economy added a paltry 115,000. Why the drop?

This month, the decline in the jobless rate wasn’t a positive sign, as it primarily came from people dropping out of the labor force. The unemployment rate is calculated based on people who are without jobs, who are available to work and who have actively sought work in the prior four weeks.

The “actively looking for work” definition is fairly broad, including people who contacted an employer, employment agency, job center or friends; sent out resumes or filled out applications; or answered or placed ads, among other things. The rate is calculated by dividing that number by the total number of people in the labor force. When the unemployed no longer count as part of the labor force, both numbers decline and the unemployment rate falls.

In April, the number of unemployed dropped by 173,000, but so did the number of people employed — by 169,000. That indicates that those people didn’t necessarily find new jobs, since the overall labor force declined by 342,000.

When people leave the labor force it could be due to discouragement of the long-term unemployed or by choice over retirement or child care. The labor force has dropped dramatically over the course of recession and recovery, and concerns have been raised it was due to discouraged workers. . . .

Meanwhile, the broader unemployment rate, known as the “U-6″ for its data classification by the Labor Department, was unchanged in April. The U-6 figure includes everyone in the official rate plus “marginally attached workers” — those who are neither working nor looking for work, but say they want a job and have looked for work recently; and people who are employed part-time for economic reasons, meaning they want full-time work but took a part-time schedule instead because that’s all they could find.

Even though the broader rate dropped, there were more discouraged workers in April and the number of part-time employees who want full-time work also increased."
Jobs Data Point to Sluggishness assesses the jobless report this way:

"U.S. job growth slowed again in April and more Americans dropped out of the work force, a fresh sign that the economy could be settling into a sluggish spring. . . .

Economists surveyed by Dow Jones Newswires had forecast a gain of 168,000 in payrolls and for the jobless rate to remain at 8.2% in April. . . .

Friday's report also brought the unemployment rate to its lowest level in more than three years. The figure has fallen sharply since August, when it was 9.1%.

But some of the decline has been due people dropping out of the work force. The labor force participation rate in April slipped to its lowest level in more than 30 years as the work force shrank by 342,000 from a month earlier.

"Falling unemployment is a feature of a shrinking labor force participation rate, not 'true' underlying improvements in job conditions," said Guy LeBas, managing director of fixed income Strategy at Janney Montgomery Scott."

Summing Up

Here's my take. We continue to crawl along with the slowest economic recovery in recent history.

While we're not going back into recession, we're going to endure a slow and painful high unemployment and low economic growth scenario for an extended period of time.

Construction employment particularly will be a long time in healing.

Our overall economy also remains weak, and will stay that way for some time.

That said,  the U.S. economy is not nearly as bad off as most European countries, where unemployment is over 10% and a recession is underway.

In future posts, we'll examine what this all means and where we're headed if we don't change course soon.

We'll also review why the socialistic European role model is a terrible example for us to follow.

They already are where we never want to go.

But we'll save that story for later.

Thanks. Bob.