Friday, July 2, 2010

More people are losing jobs but the unemployment rate is DECREASING? Must be a mistake...or is it??

LATIMES: Unemployment rate dips as more workers leave labor force

Bloomburg: June Job Losses at 125,000, But Jobless Rate Falls to 9.5%

HUH? How can that be? Lose jobs and unemployment rate decreases? Must be a mistake, right?

    Here is a simplified explanation of why the unemployment rate DECREASED in June even though there were significant job LOSSES.  It is a function of how the unemployment rate is calculated and the presence of what the Bureau of Labor Statistics calls "discouraged workers".
      Let's use a simple example.  First we need to calculate our labor force, which is the number of EMployed people PLUS our number of UNemployed people.  The govt considers you unemployed if you are 16 years of age and ACTIVELY(very subjective word) seeking employment. If you cannot find a job after 27 weeks (6 months) to a year, and this is VERY important, the BLS does NOT count you anymore as unemployed.  You are considered a "discouraged worker" and you are NOT included in the ranks of the unemployed when the unemployment rate is calculated.  You still exist, but are not counted. 
     Assume our labor force is 100 people. Of those 100, 90 are employed and 10 are unemployed.  Our unemployment rate therefore is 10% ( the number of unemployed divided by the labor force times 100). Let's say that in June, 5 of the employed people lose their jobs.  We would expect the unemployment rate to INCREASE, right? Now we have 15 unemployed and 85 employed so that makes the unemployment rate 15%% (15 divided by 100 times 100)!!  Not so fast. 
    What if in June, all 10 of our people already unemployed prior to June believe there is no job for them and they give up looking. They become classified as a "discouraged worker"?  NOW our labor force is only 90 people (the 5 who had jobs prior to June lost their jobs and are officially unemployed are counted BUT 10 moved OUT of the labor force completely.
      When we calculate our new unemployment rate we have a labor force of 90 (85 still with jobs, 5 without jobs) divided into our currently classified as unemployed (5) times 100 and we have a rate of 5.55%!!! THAT DOES NOT SEEM RIGHT, does it?
    Key point:  If the number of people leaving the labor force because they believe their is no job available to them ("discouraged") EXCEEDS the number of people LOSING their jobs, then the unemployment rate actually goes DOWN!  This creates a misleading picture of the employment situation.
   This also works in reverse---if and when the economy recovers and people believe there are jobs available, they will re-enter the job market.  In this case if previously classified discouraged worker re-enter the workforce in EXCESS of the number of people actually getting jobs, then the unemployment rate will actually INCREASE!! Again, giving a misleading read on the employment picture.
    This is why economics is frustrating to people and why I love it!!! :)

For a professional point of view on the current unemployment report click HERE(Ezra Klein)
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