The unemployment rate fell again in January, now at 6.6 percent. It’s down from 7.9 percent a year ago and from 10 percent in October 2009.
This would seem to be good news, but we’re uncomfortable. The expansion since the recession has been weak. The economy is not nearly where we want it to be. Just possibly, though, the drop in the unemployment rate in January was a sign of a stronger expansion.
The unemployment rate is a ratio, and interpreting ratios can be tricky. The unemployment rate is the number of unemployed people divided by the number of people in the labor force, times 100 to make it a percentage. What’s so tricky about that? Sometimes the unemployment rate falls even when the economy is losing jobs. It’s happened in five months since the expansion began.
In August, for example, the number of unemployed people dropped by 152,000. A lot of people found jobs, right? Nope. The number of employed people also fell, by 106,000. The labor force, which is the sum of employment and unemployment, fell by 258,000. The unemployment number fell by a greater proportion than the labor force number, so the unemployment rate dropped from 7.3 percent to 7.2 percent.
Sometimes a drop in the unemployment rate is a good indicator of economic progress. Sometimes it’s an illusion.
To tell the difference we need to look behind the ratio. We’d like to see the number of employed people rise, the number of unemployed people fall and the number in the labor force rise. That would mean unemployed people are finding jobs, moving from unemployed to employed. And it would mean that people are entering the labor force, maybe unemployed but optimistic enough to look, or maybe finding jobs right off the bat.
The unemployment rate must fall when these three things happen because the number of unemployed people in the numerator decreases and the size of the labor force in the denominator increases. Sometimes the change is too small to show up in the rate — it’s lost to rounding — but more than three-quarters of the time the rate goes down.
That’s when a drop in the unemployment rate is meaningful. Call it “really good job news.”
Really good job news almost never happens during recessions. The last time was September 1960. There were no months of really good job news in the 88 recession months since then.
During expansions, really good job news happens less often than you might think. During the 1980s expansion, 33 of 92 months showed a rise in employment, a fall in unemployment and a rise in the labor force. That’s 36 percent of all the expansion months. During the 1990s expansion, it happened 38 percent of the time. The 2000s expansion was weaker. Really good job news happened only 30 percent of the time.
Our expansion has been weaker still. In the 55 months from July 2009 to January 2014, only 11 months showed really good job news. That’s just 20 percent.
During this sluggish expansion, the number of unemployed people has increased in 21 months, employment has decreased in 20 months, and the labor force has decreased in 27 months.
In 44 months, one or more of these changes happened, and it wasn’t very good job news.
The labor force might be dropping more often because of the start of baby boomer retirements. More retirements should make the labor force grow more slowly over the next few decades. That could reduce the number of months of really good job news, even in a robust expansion.
That might make the recent decreases in the unemployment rate even more meaningful. In January, the number of people in the labor force increased. So did the number employed. And the number of unemployed decreased. It was a month of really good job news.
In fact, we’ve had four months of really good job news in the past year and three in the past five months. That’s the best stretch since early 2007.
The next jobs report will be released this week. Maybe the unemployment rate will fall again. But look behind the rate. Some “really good job news” would be a better indicator that our expansion has finally started to move.
Larry DeBoer is professor of agricultural economics at Purdue University. Send comments to email@example.com.