What is Behind the Drop in the Unemployment Rate to 8.6%?

December 2, 2011
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The Bureau of Labor statistics announced today that the U.S. labor market added 120 thousand jobs in October and that the unemployment rate dropped from 9% to 8.6%.  The number of jobs added and lost and the unemployment rate often seem to be out of step as adding or losing  jobs can have a varying impacts on the unemployment rate.  How can this be?

It is important to note that the number of jobs gained or lost by the economy is determined by a survey of established payrolls while the unemployment rate is calculated from a survey of households.  A survey is conducted of employers to determine if they added or subtracted from their payrolls to determine the number of jobs added by the economy.  To get the unemployment rate, a survey is conducted of households to determine if they are employed, looking for work, or have given up looking for work.

This explains why employers adding 100k jobs one month can lead to an increase to the unemployment rate while adding 100k jobs in another month can decrease the unemployment rate.

So, what accounted for the drop in the unemployment rate from 9% to 8.6% in October?  It was not the 120 thousand jobs added.  According the the Bureau of Labor Statistics, 315 thousand people left the work force in October and the number of people not in the labor forced increased by 487 thousand.  Had those people stayed in the work force, the unemployment rate would have remained 9% or dropped to 8.9% depending upon the calculation.  If the workforce participation rate been the same as when Obama took office, the current unemployment rate would be 11%.

Look for the administration to hype the drop in unemployment while not mentioning the number of people who have given up.  As a reminder, here is a great chart that shows the Obama administrations prediction of where things would have been with and without the stimulus and the actual numbers.

Update: Here is another chart showing the labor force participation rate barely above a 30-year low.

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