Driving the drop in unemployment

Economist Justin Wolfers joked this morning it’s a “tough day for journalists” who have to explain “how jobs growth can be weak (+120k), but unemployment declines a lot (to 8.6%).”

So true. The job growth was improved but underwhelming, and yet we also saw the unemployment rate drop from 9% to 8.6% in just a month — the sharpest decline in a year.

We’ve run into this problem before. Some months, the job-creation numbers can look much better, only to see the unemployment rate will go up, not down, simultaneously. Other months, we see the inverse.

What’s behind this? The Wall Street Journal‘s Phil Izzo takes a crack at it.

The number of jobs added comes from a survey of establishment payrolls. The unemployment rate comes from a separate survey of U.S. households. The household survey is much smaller than the establishment survey, and as a result it can swing around a lot — and move the unemployment rate up and down when it does. That volatility is a big reason why economists usually, but not always, pay much more attention to the establishment report.

The unemployment rate is calculated based on people who are without jobs, who are available to work and who have actively sought work in the prior four weeks. The “actively looking for work” definition is fairly broad, including people who contacted an employer, employment agency, job center or friends; sent out resumes or filled out applications; or answered or placed ads, among other things. The rate is calculated by dividing that number by the total number of people in the labor force.

In October, the household survey showed the number of people unemployed fell by 594,000, but the labor force — the number of people working or looking for work — fell by a little more than half that amount. That means that though the number of employed people rose, a large group just stopped looking for work. That could be due to discouragement of the long-term unemployed or by choice over retirement or child care. So the decline in the unemployment rate to 8.6% was about half due to people finding jobs and half people dropping out.

So the news behind the lower unemployment rate is kinda good … and kinda bad.

For what it’s worth, some have come to look at the “U-6” unemployment rate as the unemployment rate, because it includes just about all the non-retired adults who find themselves out of work — the unemployed, the under-employed, and those who’ve largely given up on even trying. This figure, in the new jobs report, dropped to 15.6%, from last month’s 16.2%.