Unemployment Drops to 8.6% — Can the News Really Be That Good?

This morning the Bureau of Labor Statistics released the employment report for November.  The good news is that the unemployment rate fell to 8.6%.  Wow.  But all is not rosy as we’ll see.

The headlines said the private sector added 140,000 jobs in November, but that was offset by a loss of 20,000 government jobs.  Net gain: 120,000 jobs.  Oh, really?  Allow me a brief digression.

The BLS actually does two different surveys.  The unemployment rate is based on the household survey, a large sample of U.S. households.  But the jobs numbers cited in the headlines are from the establishment survey which surveys business and government.  The two surveys often diverge, particularly during periods when unemployed workers are hanging out their own consulting shingles.  The household survey includes these new businesses, but the establishment survey doesn’t know those new businesses exist (yet).

So let’s take a closer look at the household survey results.  (Anyone who wants to play with the data should e-mail me for an Excel workbook containing seven of the BLS tables as well as a couple of tables I created for this blog.)

The number of people unemployed fell by 594,000.  Of that, 315,000 were people who dropped out of the labor force.  The civilian labor force fell from 154,198,000 to 153,883,000.  According to the household survey, the number of people employed rose by 278,000.  The sum of those two numbers (315,000 + 278,000) is equal to the change in unemployment (593,000, compared with the reported figure of 594,000, a difference most likely caused by rounding error).

Today the U.S. labor force participation rate is at the lowest level since the mid-1980s.  Is it good news that so many people have given up looking for work?  Some have taken early retirement, others have moved in with their families or friends.  An 8.6% unemployment rate is good news, but not nearly as good as the headline writers would have you believe.

For the year 2010 the labor force participation rate was 64.7%.  In November, that figure dropped even further to 64.0%.  Remember, real GDP is equal to the number of workers times average worker productivity.  The current increases in U.S. output are largely being fueled by huge productivity increases.  As the U.S. moves increasingly toward a service producing information economy, the productivity of educated people will continue to soar.  The question of what happens to the rest of the population remains unanswered.

U.S. Labor Force Participation Rate

U.S. Labor Force Participation Rate