US Unemployment Rate Drops: good news?

Recent improvements in the unemployment rate have come from people dropping out of labour force

THE unemployment rate in the US has dipped to its lowest level in more than 2 years (source: NYT).

Is this good news?

Before answering this question, it would help to understand exactly how the US Bureau of Labor Statistics measures the unemployment rate.

Measuring the unemployment rate

The “unemployment rate” refers to the percentage of the labour force that is unemployed.

The labour force consists of anyone who is either employed or unemployed, which means that the “unemployment rate” refers the number of unemployed people as a percentage of all those people who are either employed or unemployed.

The US Bureau of Labor Statistics defines a person as unemployed if they fit three criteria:

  1. they do not have a job;
  2. they have actively looked for work in the last 4 weeks; and
  3. they are currently available for work.

Implications

As a result, there are three ways that the unemployment rate can drop. An unemployed person might:

  1. become employed (good); or
  2. become underemployed (less good); or
  3. fail to find a job and stop looking for work, and as a result no longer be considered “unemployed”. That is, a person might drop out of the labour force (plain ugly).

Why has the unemployment rate in the US fallen recently?

According to the New York Times, the US unemployment rate dropped partly because 315,000 workers simply stopped applying for jobs (this is ugly).  Bloomberg Businessweek stated on Wednesday that, “In November about two-thirds of the improvement in the jobless rate came from people dropping out of the labour force and thus out of the calculation of the unemployed. Only one-third was because of actual job creation.”

Even excluding the people who left the labour force, the US has more than 13 million unemployed workers whose average period of unemployment is a record high 40.9 weeks (source: NYT).  The large number of Americans who are long term unemployed are at risk of becoming discouraged, and if they stop looking for work this is a bad sign for the US economy.

That being said, if a large number of people stop looking for work this could significantly lower America’s officially reported unemployment rate.

With presidential election set for next year, this could be good news for Obama.

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