Saturday, August 08, 2009

Why The Unemployment Rate Fell

Deja vu all over again. We've seen this before. Job losses are "less than expected" one wee, and it's ballyhooed. The next week, job losses are "greater than expected". Who is doing this "expecting"?

11:31 am August 7, 2009
By Mathew Katz

Economists were surprised by today's drop in the unemployment rate, which went from 9.5 percent in June to 9.4 percent in July. Close watchers of the labor market had expected to see the figure rise to 9.6 or 9.7. White House press secretary Robert Gibbs told reporters today that President Obama still expects to see unemployment hit 10 percent this year.

So why did the number go down in July? Part of the reason is that employers cut fewer jobs -- by 247,000, against an average of 331,000 for the last three months, including July.

Another, and perhaps larger part of the answer is that one key number factored into the rate fell unexpectedly. Unemployment is the number of people out of work as a percentage of the total labor force. The labor force in everyone who's employed or who wants a job. In July, that total labor force fell by 422,000.

Sudeep Reddy at the Wall Street Journal's Real Time Economics blog says that the jobless number is down because the overall labor force is shrinking -- people are giving up on looking for jobs, and so BLS doesn't count them as unemployed. Reddy also says that when the economy recovers, more people will likely re-enter the labor force and help push the unemployment rate higher. Or as he explains it:

The payroll figures -- jobs lost -- comes from a Labor Department survey of employers. The unemployment rate is measured through a separate survey of households -- asking people whether they have a job, whether they want a job and whether they searched for a job (among other things). If people drop out of the labor force, the unemployment rate can decline because fewer people would be considered jobless.

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