Unemployment really did go down


Maybe it’s a lesson in “check it out when so many don’t know what they’re talking about”. I needed a refresher apparently. I’m referring to the rather precipitous drop last month in the unemployment rate, from 9.0 to 8.6. I accepted a report that the drop was due to more workers giving up searching. I should have gotten a clue not just from knowing how widely the misconceptions are misconceived, but from hearing one widely misconceived misconception from somebody who usually knows his economics, someone who said unemployment dropped only because more people had run out their unemployment insurance benefits (there’s actually no connection, read on). This was a person who has a radio program, which means a bunch of people heard that, which is part of the reason for this post. Apparently I need to explain it again (doesn’t everybody read these posts of mine?)

The part I didn’t check out was the report, in regular news I think and not even commentary, that unemployment dropped because more people gave up looking for work. That happens. Sounds extremely plausible. Isn’t true this time. There’s actually a way to check.

The Bureau of Labor Statistics, from which the unemployment rate comes, has six measures of unemployment, called U-1, U-2, and so on. They’re on page 27 of the BLS November news release. The one most commonly used is U-3, sometimes referred to as the “official” unemployment rate, and U-6, the broadest measure, is sometimes referred to as the “real” rate. Just to be clear, all six are “official”, and all six are “real”. They just measure different things. I don’t know why U-3 is considered THE unemployment rate, but so it is. That’s what dropped to 8.6.

These measures are derived from a household survey, not from unemployment insurance. It doesn’t even matter for the survey if an unemployed person is receiving benefits. The survey just asks are you working, and are you looking for work. U-3 counts the people who aren’t working at all, but are actively looking. U-6 includes the people in U-3 plus “discouraged workers” or “marginally attached”, meaning people who would take a job but haven’t searched in the last four weeks, and part-time workers who would take full-time work if they could find it. If U-3 dropped because of workers giving up, then U-6 would not drop. However, a look at the BLS release shows that didn’t happen. That’s what should have been more widely reported, but wasn’t, or was misreported. U-6 dropped from 16.2 to 15.6. In other words, the percent of the workforce out of work really did fall a bunch for one month.

One other bit of good employment news is that new unemployment insurance claims dropped, to 381,000. 400,000/week is considered the marker where unemployment is getting worse, and it indicates fewer layoffs. Doesn’t say anything about hiring though.

For hiring, the BLS has a survey of employers, and came up with 120,000 new jobs. That’s below break-even in terms of cutting unemployment. How to reconcile that with fewer new claims and lower unemployment rates? There’s more than one possible answer, such as there are three different sources for those numbers. The new claims number is just people newly unemployed, and even then counting only those who file for unemployment insurance. The new jobs number comes from a survey asking employers how many they hired and fired, and the unemployment rate surveys households. They can get contradictory results month to month. For added fun, both survey results get adjusted with new data, so the first announcement isn’t final. They could come more in line with each other.

Another possible explanation is more people left the workforce entirely, so they don’t get counted in any employment measure. Students, retirees, disabled, and stay at home spouses don’t get counted in the labor force, so if more people joined those groups, that could explain unemployment dropping despite slow job growth. The number of people out of the labor force did increase, but so did the population. It’s also not necessarily bad if working age people stay in school or return to school, if you believe education is not only good for the job seeker and the employer, but a more educated population is better for the country. People taking early retirement or disability benefits as a sort of extended unemployment insurance isn’t good, and actually accounts for Social Security’s first shortfall in new revenue along with the drop in revenue from fewer people working. It also means they could keep the unemployment rate higher as the economy improves, encouraging people to get back into the work force and thereby get counted as unemployed. It’s a reason why unemployment is a lagging economic indicator.

My best guess, since unemployment claims dropped, is the people leaving the work force aren’t enough to account for the drop in unemployment, and that the jobs growth numbers will be adjusted higher. If that’s right, we’re still not seeing the sort of rapid job growth we need to recover from the recession, but we are growing. In real-life terms, given the discrimination against unemployed people, it looks like your chance of landing another job if you’re currently employed isn’t bad, and there’s no cause to panic if you’re short-term unemployed — though I strongly advise against delaying the job search. Taking a bit of free time not only gives conservatives reinforcement for their belief unemployed people just don’t want to work, but you burn through your best chance to find work. The long-term unemployed are still being left out though. Being unemployed not only makes employers nervous (if these applicants are so good, why did no one else hire them? I must be missing something … think I won’t take the chance), but I’ve heard anecdotes of HR departments using unemployment as a screen to get through mounds of applications. If you’re currently unemployed, you go into the reject pile right at the start.

So that would be great if this drop in the unemployment rate means everything we might hope it means, and the economy is growing, and no more stimulus is needed, but it’s probably not so. We still need governments to be the employers of last resort, and hire somebody to do something (even stopping layoffs would be a big help — once again, private hiring was larger than total job growth, because governments cut a load of employees just like every month the last couple years roughly), particularly long-term unemployed the private market ignores. Gov. Mark Dayton is probably going to try again to get the Republicans to pass a large bonding bill, and at least they won’t be able to use the argument that bonding should be put off to non-budget sessions, but states are far more constrained than the federal government. We need for the federal government to pick up the hiring.

Certainly there must be jobs in teaching economics to congressional Republicans. It’s obviously an unmet need.