Unemployment rate hinges on more than job gains

January 6, 2012 - 6:15 PM

WASHINGTON (AP) — For most people, the 8.5 percent unemployment rate is the most visible sign of the economy's health. The rate's every movement is closely watched, especially in an election year.

But economists tend to pay closer attention to the number of jobs created each month. That figure doesn't always move in lock step with the unemployment rate.

In December, the economy created 200,000 net jobs, and the rate fell two ticks. But part of the reason it dropped was because 50,000 people without jobs stopped looking for work.

Once people stop looking for work, they are no longer counted as unemployed. In some cases, if many people stop looking for work, the unemployment rate can fall — even if no jobs are created.

The reverse can happen, too. If many people who were not looking suddenly resume job searches, the government will start counting them as unemployed and the rate can go up.

What complicates this further is that people start and stop looking for work for varying reasons. Some return to school. People retire. Immigration can slow. In tough economies, people who were looking for work become discouraged and stop. That's what happened during and after the Great Recession.

The monthly job gains and the unemployment rate are reported in separate surveys. The job gains are come from a survey of employers. The unemployment rate is calculated from a survey of households.

Last year, the economy gained 1.6 million jobs, the employer survey found. That's an improvement over 2010's gain of 940,000.

Those job gains have helped push down the unemployment rate. But another reason the rate dropped is the nation's work force barely grew — even as the population has increased.

As a result, the proportion of adults who are either working or looking for work has shrunk over those two years, from 64.6 percent to 64 percent. That's formally known as the labor force participation rate.

Heidi Shierholz, an economist at the liberal Economic Policy Institute, says that if that rate hadn't declined, the unemployment rate in December would be 9.5 percent — a full percentage point higher.

The economy has created more than 100,000 jobs in each of the last six months — the first time that has happened since April 2006. Economists had thought those job gains would have drawn more discouraged workers back into the labor force.

But that has yet to happen.

"The fact that we haven't seen much of a rebound in the labor force ... is a little contrary to what we were expecting," said Marisa DiNatale, an economist at Moody's Analytics.

The aging of the work force could be one reason for the smaller work force. Many baby boomers could be retiring early. Other economists note that immigration has slowed.

But Mike Feroli, an economist at JPMorgan Chase, points out that the proportion of adults aged 25-54 who are in the work force has also fallen, which presumably isn't because of retirements.

Some young people have gone back to school. In families with two working parents, one parent may have decided to leave the work force to raise children full time.

Most economists think there will be a rebound in participation, which will likely push up the unemployment rate. But it could take more hiring before the rebound kicks in.

"It's not surprising to me that they're not coming back yet," Shierholz said. "It will take more robust job growth to get them to look for work."