The Big Move in Unemployment

Fri, 06 Jun 2008 13:12:14 +0000

The May employment report is another disappointment. Nonfarm employment fell another 49,000, marking a 324,000 decline (0.23%) since the peak in December. That headline will likely be overshadowed by the large increase in the unemployment rate, from 5.0% in April to 5.5% in May. Note that these two statistics come from different surveys--nonfarm employement is from a survey of establishments and the unemployment rate is from a survey of households.

What's behind the unemployment rate increase? The unemployment rate is the ratio of those unemployed to the civilian labor force (the sum of those employed plus those unemployed). Recall that you can be out of work but not counted as unemployed--to be unemployed, you have to be looking for work. When interpreting the numbers, we also have to be careful to acknowledge that these are net flows from the survey. For example, in May, according to the household survey:

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577,000 people joined the labor force.

Some people joined the labor force. Some people left the labor force. The former group is larger than the latter by 577,000.

285,000 people left employment.

Some people gained new jobs. Some people lost their jobs. Most people in one of those groups are also in the other group. But in total, the latter group outnumbered the former group by 285,000.

If we add these two numbers together, we get a total flow into unemployment of 862,000, reported as 861,000 in the news release due to rounding. The number of unemployed increased by 861,000 on a base of 7,626,000, an increase of 11.3%. The labor force went up by 577,000 on a base of 153,957,000, an increase of 0.37%. The disparity accounts for the increase in the unemployment rate.

I have in the past noted that there are alternative measures of unemployment that include discouraged workers, marginally attached workers, and those employed part-time for economic reasons (see Table A-12 of the news release). In May, those alternative measures shared the 0.5 percentage point increase, suggesting that the net flow into the labor force was from those who were previously content enough to not be working that they didn't even register as marginally attached. That makes it more difficult to tell a single story from the net flows.

Nonetheless, we will likely hear this "spun" by those in office as having some good news in it, in that an improvement in the economic outlook may draw more people into the labor force to look for work. While that is true, and that may be happening, it is not appropriate to spin the increases in the labor force participation rate (here, from 66.0 to 66.2% of the population) as good news without also acknowledging that decreases in the labor force participation rate--of which there have been many--were bad news.

More importantly, it is simply too soon to know whether this is a blip or the start of a trend, good or bad.