Friday, February 4, 2011

Unemployment Rate Decreases BUT virtually no new jobs were created...HOW can THAT happen?

Today the latest jobs report came out from the Bureau of Labor Statistics (BLS).  It shows the unemployment rate droppling, as a percentage, rather significantly, but the economy only added 36,000 net new jobs.  How can it drop so much with so few jobs created?  Let me use a simple example to shed some light...

Assume we have a small economy with only 100 people. 90 of this people have jobs and 10 are 16 years of age or older and are actively seeking work (the govt. definition of unemployed).  The unemployment rate is calculated by taking the number of unemployed (10) and dividing by the Labor Force (the number of unemployed PLUS the number employed = 100 in our case) and multiply by 100.  We get an unemployment rate of 10%.

Fast forward 1 month.  We still have 90 people working BUT 5 of the unemployed people decide there is not a job for them and they don't believe there will be for a while. They no longer "actively" seek work. They drop out of the Labor Force.  The remaining 5 unemployed people stick it out and continue to "actively" seek employment. Our Labor Force (employed + unemployed)  has now dropped to 95.  Our number of unemployed has dropped to 5. The new unemployment rate is now 5.26% (5/95 X 100)! Sounds great...doesn't it?  It is obvious the job situation has not improved and only looks better on paper because some people dropped out of the Labor Force.

This is a reminder that you always have to look "below the fold" to find out what is really going on.  See if you can catch "the media" and/or politicians misusing this "good news". 

I look forward to when the economy is in quick recovery and lots of jobs are created and we observe the unemployment rate INCREASING.....Say what? That does not make sense...Right??? Stay tuned for a solution to that mystery...HOPEFULLY that will be soon!!!
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