Unemployment is Worse than Reported

Part of my job as an AP Macroeconomics teacher is to interpret employment statistics. Unemployment declined from 9 percent to 8.6 percent in November of 2011. Is that a good thing? In this case, no. The government does not count people who have given up and are no longer looking for work. Many gave up last month (more than 300,000 as reported by most media outlets), and that is the major reason why the percent of unemployed decreased.

Here is a quote from the Bureau of Labor Statistics' (BLS) report: 

In November, 2.6 million persons were marginally attached to the labor force, about the same as a year earlier (italics, mine)....  These individuals were not in the labor force, wanted and were available for work, and had looked for a job sometime in the prior 12 months. They were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey. 

I am not a pessimist. We will eventually reach our natural rate of unemployment, around 4.5-5%. But we are not creating enough jobs yet. We need to create around 150,000 jobs just to keep up with natural population growth and keep unemployment from going up.  Both government and private sector jobs need to be part of the mix. According to the  BLS

Economists sometimes refer to the "trend growth rate of employment"—the number of jobs that must be added each month to keep pace with population growth and changing trends in labor force participation. Common "rule-of-thumb" estimates of trend growth currently put the figure at 150,000 jobs per month. This means that over-the-month changes in payroll employment exceeding 150,000 generally are interpreted as strong job growth, while smaller increases are seen as weak job growth.

So what happened in November? The private sector added 140,000 positions in November, but government cut 20,000 positions. Therefore the United States added 120,000 jobs in November, only enough to tread water.  The BLS states:

Government employment continued to trend down in November, with a decline in the U.S. Postal Service (-5,000). Employment in both state government and local government has been trending down since the second half of 2008.

Even if government had cut no jobs, 140,000 is not enough growth to make much of a dent in unemployment figures. The recovery from the Great Recession of 2008 has been atypical. We used to see much more robust growth after a recession, around 300,000 jobs created each month, 1.25 million for a quarter. See http://bls.gov/opub/mlr/1984/08/art1full.pdf  So don't pop the champagne corks just yet. The employment news is barely adequate. By the way, the actual rate is probably closer to 11 percent. I don't foresee much improvement without an increase in consumer spending, currently hitting new lows.

Postscript: The December 2011 figures were much better, with around 200,000 jobs created. However, the second quarter 2012 figures were subpar, and it seems, in August of 2012, that we are again averaging around 150,000, not good enough to meaningfully change unemployment. See also Mish's excellent economic blog here.