It’s Still about the Jobs Stupid! Redux

The upward momentum in the unemployment rate seems to have abated as last month’s figure shows a statistically insignificant decrease to 9.4%. The unemployment rate itself is not the best indicator of what’s going on in the labor markets, but the changes from month-to-month give us some indication of improvement. Reuters reports that payrolls fell less in July giving some indication that things are slowly improving. This is a good indication that we may be approaching the bottommost point of the recession. The upward momentum is slowing.

Employers shed 247,000 jobs in July, the Labor Department said Friday, the least in any one month since last August, taking the unemployment rate to 9.4 percent, down from 9.5 percent in June.

“It suggests the recession will be ending before the end of the year. There isn’t any part of the economy that hasn’t shown some slowing in deterioration,” said Joe Davis, chief economist at Vanguard in Valley Forge, Pennsylvania.

Whenever economists teach about the job markets, we always mention that the unemployment rate should never be looked at as the sole indicator employment trends. Indeed, we alread see some discussion on the finance/econ blogs that remind us that it’s the underlying flows of people in and out of the job market as well as the rate of job creation that give us a full sense of what’s going on.

Daniel Indiviglio at The Atlantic asks Did the Unemployment Rate Really Go Down? and discusses one of the biggest bones of contention in measuring the rate itself, the discouraged worker. Discouraged workers are those people that have been unemployed and looking for work for so long that they’ve given up the search. Once you give up the search for a job, you leave the ranks of the ‘unemployed’ and you no longer count in the unemployment rate. The number of these folks becomes significant once a recession goes on for some time.

First, here’s the official Bureau of Labor Statistics report (opens .pdf), if you’d like to read the whole thing for yourself. Now let’s tackle the question of how the unemployment rate could decrease while the number of unemployed actually increases. BLS’s report notes:

The civilian labor force participation rate declined by 0.2 percentage point in July to 65.5 percent.As a recession drags on for this long, and people are unable to find jobs, they begin leaving the workforce. They become discouraged regarding job prospects. BLS offers an unemployment rate that includes these discouraged workers. In June 2009, that was 10.1%. For July, it was 10.2%.

Given this change in unemployment including discouraged workers, I think it’s pretty clear that the 0.1% decrease in the reported unemployment rate can be misleading. In reality, those who would like a job but don’t have one increased by 0.1% up to 10.2%.

I should note that these figures are not seasonally adjusted. If you believe in adjusting these number based on season, then they are not as bad. The seasonally adjusted unemployment rate including the discouraged actually improved, moving from 10% in June to 9.8% in July. I’m not sure that I put much credence into discouragement having a lot of seasonality though, which is why I prefer the actual numbers.

What do these numbers mean in the broader context? That the unemployment rate is not necessarily going to decrease each month going forward. Once those discouraged workers feel more encouraged, they will begin looking for work again and will be included in the reported national unemployment rate until they find a job.

We can also go back to the Reuters piece for further clarification. ( I highlighted the relevant section.)

Analysts had expected non-farm payrolls to fall by 320,000 in July and the jobless rate to hit 9.6 percent. The forecast was made earlier this week before other jobs data prompted some analysts to lower their estimates for job losses.

The government revised job losses for May and June to show 43,000 fewer jobs lost than previously reported.

The easing in the unemployment rate could have been the result of the labor force shrinking by 422,000 in July, far more than the 155,000 decline in June, suggesting jobless workers may have given up looking for new work.

In the U.S., for the purpose of calculating the unemployment rate, the labor force is defined as those with a job plus those out of a job but actively looking for work.

So, the momentum of joblessness is slowing but much of this may be due to the number of people both entering and leaving the work force more than it being a sign of people actually finding a job. When you find a job, you become employed AND you remain part of the labor force. So, this rate stabilization is good news but not great news, if that makes any sense. It could mean that more folks are just giving up on finding jobs and not entering the labor force or are exiting the labor force.

The NY Times reports that most economists expect the job markets to remain bleak for some time. This means it’s less important to really follow the unemployment rate but to look at the job creation rate. One indicator is the number of help wanted ads and if those numbers are increasing or decreasing. That is one leading indicator that many labor economists follow. It is especially an indicator for job growth in small and medium sized businesses who are less likely to recall people but rely more on new help.

Now, even if the economy begins growing again this summer — as many economists expect it will — laid-off workers are likely to be among the last to benefit. Businesses that slashed their work force and inventories over the last year to cope with the economic deterioration are likely to hire temporary workers or pay overtime wages before they begin fielding applications for new full-time workers.

That means hundreds of thousands more workers are likely to lose their jobs, perhaps well into next year.

“The basic message is that the rate of job cuts is diminishing, and that’s good news,” said Nariman Behravesh, chief economist at IHS Global Insight. “Still, you’re seeing job cuts everywhere except education, health care, government. I don’t think we’re at bottom yet in employment.”

Manufacturers shed 52,000 more jobs, and the industry has lost 2 million jobs since the recession began. Construction businesses cut 76,000 jobs, and 87,000 were lost in trade and transportation.

“We’re a long way from the end of the employment problem,” said Brian Fabbri, an economist at BNP Paribas. “Things are improving, make no mistake. But we’re not near the time when businesses are going to hire again.”

And for unemployed Americans scouring want-ads and tacking their résumés up onto online job boards, patience — and money — are wearing thin.

Jobs will be the main issue by the time that the election season begins again. Again, if folks are nervous about their paychecks, they won’t spend. Tight job markets also tend to hold down wages and incomes. None of this bode well for an economy that relies heavily on household expenditures for economic growth.

Please !!! Digg!!! Share!!! Tweet!!!

Add to: Facebook | Digg | Del.icio.us | Stumbleupon | Reddit | Blinklist | Twitter | Technorati | Furl | Newsvine