Unemployment Surprise

Article excerpt


The spike in the unemployment rate from 5.7 percent in July to a five-year high of 6.1 percent in August left forecasters with egg on their faces. No change or a slight uptick had been expected.

Even with the 84,000 August drop in nonfarm payroll jobs, the eighth monthly job decline in a row, last month's jump in unemployment was out of proportion to the weakness in employment. There are lags and catch-ups in economic data, so one month doesn't tell the story. A closer look shows the employment-unemployment relationship has been out of historical whack all year. Insofar as economic forecasters are empiricists who rely on past behavior for guidance, recent underestimates of joblessness are understandable.

Since the beginning of the year, employer-reported payroll jobs have dropped by more than a half million while unemployment has risen by a surprising 1.8 million. Total employment, as measured by household survey, is down by 771,000.

In the past, when the job market has deteriorated, labor force participation has also declined. Some people who lost their jobs saw no point continuing a futile search and some who would have liked to enter the work force postponed doing so until prospects improved. Since government statistics count as unemployed only jobless people looking for work, the decline in labor force participation dampened the rise in the unemployment rate.

What's unusual about this downturn is the larger number of people who are either starting or persisting in a job search despite the dimmer prospects of finding work. They have pushed up the unemployment rate to above normal levels relative to total job losses.

Given the drop this year in the percentage of the working-age population employed, the labor force participation rate (the proportion of the population in the work force) would have been expected to decline from 66.1 percent in January to 65.8 percent in August, based on previous experience. But the participation rate hasn't declined - it was 66.1 percent last month. That means 800,000 more people are in the labor force and unemployed than past relationships in the data would have predicted.

The unemployment rate under more normal circumstances would have been 5.6 percent last month instead of 6.1 percent as reported - a big difference with political implications. The estimated gap between rates was smaller in July, 0.3, as previously reported on this page. If rising unemployment gets further out of synch with employment, it could raise new questions about the meaning of the unemployment data. …