August Unemployment Report: Rate drops, but Data Tells a Different Story

Today the Bureau of Labor Statistics released its August jobs report, which showed that the unemployment rate dropped from 8.3% to 8.1%, and payroll grew by 96,000.

Economists had predicted somewhere between 120,000 and 140,000 jobs, with a growth of 150,000 jobs a month needed just to keep up with natural population growth. However, despite the poor job creation number, the overall unemployment rate went down. Why? It all has to do with how the rate is calculated and who counts as unemployed.

While unemployment rate dropped, the underlying data indicates that it was not due to more people being employed, but rather discouraged workers dropping out of the labor force and thus not being counted in the official rate.

1)      Work Force Participation Rate Drops to Lowest Level since 1979:

As noted in earlier analyses of the jobs report, the labor force participation rate has dropped precipitously in the past few years. The participation rate fell from 63.7% to 63.5%. The last time it was this low was under the Carter Administration. That .2% difference translates to more than 350k people no longer considered part of the workforce. In other words, they are no longer looking for work. One might think that this drop is at least partially due to the aging baby boomers, but as pointed out here, more Americans over the age of 60 are in the workforce than ever before.

So why is this important? A drop in the labor participation rate can mean any number of things, such as an aging population (which has already been dismissed as a cause) or people are leaving the workforce due because they think the job market is so bad, there is no chance of them finding a job. The decoupling of the different unemployment rates detailed here indicates that this is the case.

2)      The Total Number of Employed Persons Dropped by 120,000

In addition to reporting the raw number of unemployed people, Labor Statistics also reports the total number of employed people. Despite 96,000 jobs being created, the number of people employed actually fell for the month of August. This means that only 236,000 more people are employed now than were employed in April.

3)      The Number of People Not in the Labor Force but Wanting Jobs Jumps by 400,000

It stands to reason that the large majority of those who dropped out of the workforce last month contributed to this jump. These people however, are not included in the official unemployment rate because the official unemployment rate does not include those not actively searching for work.

If all of those not in the labor force, but wanting jobs were included in the unemployment figures, the rate would be 12.6%, an increase of .1% from the July figures.