Unemployment rate hinges on more than job gains

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Posted: Jan 06, 2012 6:29 PM
Unemployment rate hinges on more than job gains

For most people, the 8.5 percent unemployment rate is the most visible sign of the economy's health. The rate's every movement is closely watched, especially in an election year.

But when the rate declines, it's not always because many more people were hired. In fact, the unemployment rate can rise or fall even when no jobs are created or lost.

Here's why:

The unemployment rate counts only people who don't have a job and are looking for one. Once you stop looking, you're no longer considered unemployed.

In December, the economy created 200,000 jobs. That helped drive the unemployment rate lower. But there was a contributing factor: About 50,000 people stopped looking for work. So they were no longer captured in the unemployment rate.

Consider what would happen if lots of people without jobs suddenly resumed looking for one. Such an influx could raise the unemployment rate _ even if the economy added jobs.

So far that hasn't happened.

People start and stop looking for work for varying reasons. Some return to school. People retire. Immigration can slow. In tough economies, people who were looking for work become discouraged and stop. That's what happened during and after the Great Recession.

Because many factors can skew the unemployment rate, economists find that a better way to assess how much hiring is going on is to simply follow the number of jobs created each month.

The monthly job gains and the unemployment rate are reported in separate surveys. The job gains come from a survey of employers. The unemployment rate is calculated from a survey of households.

Last year, the economy gained 1.6 million jobs, the employer survey found. That's an improvement over 2010's gain of 940,000. It helped lower the unemployment rate from 9.1 percent when the year began.

The decline is being magnified by short- and long-term trends that are bringing down the percentage of adults either working or looking for work. That percentage has ticked down over the past two years, from 64.6 percent to 64 percent. It's formally known as the labor force participation rate.

If the participation rate had stayed the same, more people would have been competing for jobs, and the unemployment rate in December could have been as high as 9.5 percent, said Heidi Shierholz, an economist at the liberal Economic Policy Institute.

The economy has created more than 100,000 jobs in each of the past six months _ the first time that has happened since April 2006. Economists had thought those job gains would have drawn more discouraged workers back into the labor force.

Not so far.

"The fact that we haven't seen much of a rebound in the labor force ... is a little contrary to what we were expecting," said Marisa DiNatale, an economist at Moody's Analytics.

The aging of the work force could be one reason for the smaller work force. Many baby boomers could be retiring early. Other economists note that immigration has slowed.

But Mike Feroli, an economist at JPMorgan Chase, points out that the proportion of adults aged 25-54 who are in the work force has also fallen, which presumably isn't because of retirements.

Some young people have gone back to school. In families with two working parents, one parent may have decided to leave the work force to raise children full time.

Most economists think there will be a rebound in participation, which will likely push up the unemployment rate. But it could take more hiring before the rebound kicks in.

"It's not surprising to me that they're not coming back yet," Shierholz said. "It will take more robust job growth to get them to look for work."