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All Da King's Men

Why The Unemployment Rate Is Dropping

By Da King Published: February 5, 2012

We had a pretty good jobs report in January, with 243,000 jobs created. That's a good sign...but only if it continues. If we created 240,000 jobs every month, that would be 2.88 million jobs created over a year's time. Not too bad. If that continues for several YEARS, we'll be in decent shape, so I'm not going to get overly excited yet. Still, it's a good bit of news in what have been some bleak economic years.

Our economy is supposed to create jobs. That's normal. I looked at some jobs data going back through history, and every presidential administration since Calvin Coolidge has created jobs, with two exceptions - Herbert Hoover from 1929-1933 (the Great Depression), and Barack Obama. The only other President beside Hoover and Obama who didn't have net job creation during his first term was George W. Bush.

While job creation is great, the unemployment rate is not falling due to America's great job creation numbers, because they haven't been that great.

The unemployment rate is falling because record numbers of people are leaving the work force. We have the lowest labor participation rate in 30 years, as per the chart below (from Bloomberg):

What this means is that so many people are unemployed over the long term or dropping out of the work force for other reasons that they no longer show up in Bureau of Labor Statistics (BLS) data as being unemploymed (BLS only counts those receiving unemployment benefits as unemployed).

In January, a record 1.2 million people left the labor force. They don't have jobs, but they are no longer counted as unemployed. The smaller labor participation rate is the primary reason the official unemployment rate (8.3%) is falling. If we were to recalculate the unemployment rate using the work force participation rate from December 2007, it would be 11% instead of 8.3%.

Here's the even more depressing part. To get our labor force back to the participation rates we had prior to the recession, we'd have to add about 5.7 million more jobs above the rate of population growth. With current rates of population growth, it takes about 1.6 million new jobs created every year JUST TO BREAK EVEN. To date under the Obama administration, we have not done that. We still have a net loss of 2 million jobs under Obama. Still, things are turning around somewhat. In his SOTU speech, Obama said, "in the last 22 months, businesses have created more than three million jobs". That's roughly accurate, but it doesn't really mean the employment picture is getting better. It just means it's not getting worse. It means it's keeping about even with population growth.

We have a LONG way to go.

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