Unemployment rate vs. the number employed

The December unemployment rate is out and - SURPRISE!!! - it's down to 8.5%. Isn't that just wonderful? Think of all the people who now have jobs.

Actually, the percent of people participating in the labor force (those who actually have jobs) was unchanged at 64%. So if the percent of people employed stayed the same, how did the unemployment rate go down?

These are just statistics and unless you truly understand what they're measuring and how they're calculated, it means little, especially if you're one of the people still without a job.

As a commissioner, every month I checked the employment information put out by the state of Ohio. What I found is that unemployment rates went up and down and, because they're a result of dividing two numbers, the better thing to watch was the actual numbers and not the calculations.

Ohio's report, Civilian Labor Force Estimates, lists the number of people in the labor force, the number of people employed and then calculates the number of people unemployed by subtracting the second number from the first. They then divide the number of unemployed by the total in the labor force and end up with an unemployment rate.

For November 2011, Lucas County had 216,600 in the labor force and 198,100 employed leaving 18,500 without work for an unemployment rate of 8.5%. December numbers have not yet been released.

Toledo is one of the cities that the state tracks. They had 142,400 in the labor force and 129,600 employed leaving 12,800 without work resulting in an unemployment rate of 9.0%.

But the state also has a search tool on their website where you can get these same numbers for the whole year - and that's where the numbers get interesting.

This chart (click for a larger view) shows the civilian labor force (CFL) for Lucas County for 2011:


You can see how the number of people in the labor market varies greatly over just a year.

This chart shows the number of people employed in Lucas County for 2011:

















Yes, there were roughly 5,000 more people working in November than there were in January of last year, but the November figure is less than the number working in the months of April, May, June, August, September and October.

And yet the unemployment rate for those six months was HIGHER than it was for November.

How can we have fewer people working and still have a decrease in the unemployment rate?

The only way the unemployment rate went down, despite having fewer people employed, is because the base number - the number of people in the labor force - went down, as the first chart demonstrates.

We went from a high of 221,900 in the labor force down to 216,600. And even though November had 200 less people employed than August (198,100 vs. 198,300), the unemployment rate dropped from August's rate of 10.0% to November's rate of 8.5%.

Clearly, a difference of 200 people actually working does not result in a drop of 1.5%. But it does if the base number (CLF) also goes down.

August:
220,400 Civilian Labor force
- 198,300 employed
_________
22,100 unemployed for an unemployment rate of 10.0%

November:
216,600 Civilian Labor Force
- 198,100 employed (roughly the same number as August)
_________
18,500 unemployed for an unemployment rate of 8.5%

See how easy it is to manipulate the unemployment rate simply by lowering or raising the labor force number?

This also applies to the national unemployment rate, since the rates are calculated the same way.

I realize this is a lot of numbers, but it's important to know how unemployment rates are calculated and what is behind the numbers. That way, you won't come to a wrong conclusion based only upon the results of the calculation (unemployment rate) or what the politicians and talking heads tell you it means.

After publishing this post, I found this article (posted after mine) which makes the same argument:

Real Jobless Rate Is 11.4% With Realistic Labor Force Participation Rate

One does not need to be a rocket scientist to grasp the fudging the BLS has been doing every month for years now in order to bring the unemployment rate lower: the BLS constantly lowers the labor force participation rate as more and more people "drop out" of the labor force for one reason or another.

Maybe we are starting to get it.