January Unemployment

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U.S. Labor Force Participation Rate

U.S. Labor Force Participation Rate

The January unemployment rate was released this morning.  Let’s get one thing out of the way right now.  Last month I forecast 8.7% for January.  The actual was 8.3%.  “Forecasting is difficult, especially when it’s about the future.” – Nils Bohr

Economics is known as the dismal science.  You’re about to learn why.  How can a 0.2 percentage point decline in the unemployment rate be bad news?  Read on.

First, every January the BLS updates their data for the civilian non-institutional population to align their data with information from the Census Bureau and other sources.  Guess what?  The bump to population was 1,685 thousand.  At the same time the civilian labor force increased by 508 thousand.  The labor force participation rate fell to 63.73%, the lowest level since 1979.

So apparently there were about 1.7 million folks that BLS thought were dead that were, in fact, alive.  Some have argued that the decrease in the labor force participation rate is partly caused by the retirement of baby boomers.  I wish.  Everyone I know born after World War II is still working or looking for work.

Let’s look at changes between December, 2011 and January, 2012.  The number of people unemployed fell by 339 thousand.  Good news.  And the number employed rose by 847 thousand, also good news.  But 1,177 thousand people dropped out of the labor force.  The employment – population ratio has remained virtually constant at 58.5% for the last three months.  That means the gyrations between employment, unemployment, and labor force dropouts are just about offsetting each other.

When the unemployment rate drops mainly because an additional million people have left the labor force and population estimates are revised … well, let’s just say this report is not the sign of a healthy economy.

As always my work is an open book.  Click here for the most recent Excel workbook.

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About Tony Lima

Retired after teaching economics at California State Univ., East Bay (Hayward, CA). Ph.D., economics, Stanford. Also taught MBA finance at the California University of Management and Technology. Occasionally take on a consulting project if it's interesting. Other interests include wine and technology.

4 Replies to “January Unemployment”

  1. Otis Kershaw

    On an annual basis, the available job pool in the corporate world is shrinking by 3-5% every year. At the same time we are continuing in the US to train people to work in this system creating a declining job pool, with more people being trained to fill jobs that are disappearing creating huge unemployment. So why are we continuing to train people for jobs that won’t exist? Today the unemployment rate is running around 7.8%, but if we calculate that number in a real sense the number is closer to 15%. How you ask? We don’t count someone as unemployed if they haven’t looked for a job during the last 30 days. Tell that to those who can’t find a job in their field who are unemployed by the true definition.^ [extraneous ad deleted.]

  2. TonyLima

    Here’s the problem: private sector jobs are disappearing but government is hiring more people. Who pays for government? We do today with our taxes. Our children, grandchildren, and other future generations pay in the future when our current government debt comes due. (In reality, that’s oversimplified because governments can continue forever in theory. However, the rate at which the U.S. is adding to the debt cannot be sustained even in the medium run. As one of my Twitter pals put it, “The U.S. is one failed Treasury auction away from disaster.” BTW, right now about 40% of newly issued U.S. government debt is purchased by the Federal Reserve.)

    In any case, for better or worse it’s the private sector that creates income and wealth and, therefore, tax revenue. Government can do none of those things. An ever-growing government combined with an ever-shrinking private sector turns a country into Greece sooner or later. Please don’t hesitate to ask more questions. I just got home from a baseball game and may not be writing as coherently as I’d like.

  3. Tag

    Why doesn’t the Fed just buy ALL the government debt? As long as they’re printing fiat dollars, why not keep all of that debt out of the hands of the Chinese. It can’t have any different inflationary effect; in fact it might keep it down because the Fed is likely to be less demanding than others.

  4. Tony Lima

    Um, Jim, the Fed is expanding the monetary base plenty fast right now. The problem is that banks are holding a huge chunk of the monetary base as excess reserves — meaning the money supply isn’t increasing much despite what the Fed is doing. Meaning the Fed probably could buy all the government debt, but they won’t because (a) they already have a problem if banks suddenly start lending and (b) they’d like to preserve the private market for Treasuries.