The US unemployment rate fell to a four-year low of 7.7% in November, it was reported yesterday. The BLS (Bureau of Labor Statistics) report also noted that the economy added 146,000* jobs in November, a better figure than expected, considering Hurricane Sandy. Yet the report did not get a particularly warm reception. Analysts and cynics instantly threw cold water on these seemingly good numbers by stating that the unemployment rate fell only (or largely) because masses of unemployed people stopped looking for work in November and therefore were no longer counted as unemployed. Were they right? Off to the report’s detailed tables!

First, the non-detailed tables. Table A suggests that more than 100% of the drop in the unemployment rate came from people leaving the labor force, which could mean unemployed people giving up looking and no longer being counted as unemployed or in the labor force. The unemployment rate and labor force participation rates both fell by two-tenths of a percentage point, unemployment from 7.9 to 7.7% and labor force participation from 63.8 to 63.6%. The number of employed fell by 122,000*; the number of unemployed fell almost twice as much (229,000); and “not in labor force” rose by 542,000. So it would seem that a lot of people stopped looking.

(*That’s right — the same report that says the net change in jobs in November was +146,000 also says it was -122,000. The reason is that the BLS conducts two different surveys, one of employers (the “establishment survey” of payrolls), which had the positive figure, and one of households, which had the negative one. Barry Ritholtz had a nice cranky comparison of the two a few years back that’s still worth a look. Unfortunately, even though many economists regard the employer survey as more reliable, it tells us only about things like employment, hours, and wages, not about the people in or out of the labor force. For that we still need the household survey. Back to it.)

The “not in labor force” population can rise for several reasons, not only because unemployed people stop looking for work. If someone turns 16 and is still a full-time student, that person is “not in the labor force,” whereas a day ago as a 15-year old that person wasn’t part of the relevant population and didn’t (ever so slightly) lower the labor force participation rate. If someone retires, that person also exits the labor force. If an employed or unemployed person goes into the military or to prison, he or she exits the civilian noninstitutional labor force, which is the standard one used. If someone chooses, independently of labor force conditions, to quit work or quit looking to go back to school full time or to be a full-time parent or homemaker, that person exits the labor force. And because the cutoff for part-time workers is 15+ hours a week, then a part-time worker who chooses to work, say, 14 hours a week instead of 15 also exits the labor force. When labor force participation drops, it’s good to know why. The tables offer a bit of help here.

Table A-15 gives alternative unemployment rates that include discouraged job-seekers, people “marginally attached” to the labor force, and part-time workers who can’t find full-time work. Notably, the most comprehensive measure, the “U-6 unemployment rate,” which includes all of those people, also fell two-tenths of a point, to 14.4%. The two alternative unemployment rates that ignore involuntary part-times but do include discouraged job-seekers (those who’ve given up looking because they think conditions are bad) and “other marginally attached” persons (who want work but aren’t looking because of non-economic reasons like family and health), each fell by one-tenth of a point, to 8.3% and 9.2%. If the improvement in the unemployment rate were solely due to a rash of unemployed people giving up their job searches, then these numbers should not have changed at all, as some of October’s unemployed became November’s “marginally attached.” But based on those last two figures it does look like half the reduction in the standard unemployment rate came from unemployed workers who stopped looking for work and thus lost their attachment to the labor force. The standard unemployment rate fell by 0.2 point; these measures fell by 0.1 point. So some of October’s unemployed apparently did become discouraged job-seekers or “marginally attached” in November.

It is still true that the entire improvement in any of these unemployment rates is from the shrinking of the labor force. In the past year, the number of adult (age 16+) Americans not in the labor force rose by about 2.5 million, to more than 89 million. According to the BLS’s survey, the vast majority of them say they do not want a job, and only about a million total clearly fit the definition of “discouraged worker” (what I call “discouraged job-seeker” to avoid confusion). Especially considering that the labor force participation rate is calculated as a percent of the entire civilian noninstitutional adult population, with no upper limit on age, some of the long-term drop in that rate is just going to reflect the aging of the population. Then again, the Economic Policy Institute has sliced up these data to include “prime-age” workers of age 25-54 only, and the trend does not look good. The participation rate fell sharply during the 2007-2009 recession, from about 80 to 76%, and it is just as low now as when the recession ended in summer 2009.

Breaking it down with the help of the BLS tables, we see that the falling participation rate is fairly general, and particularly large (a full percentage point or more) among African-American females and teens, and recent female veterans. The only exceptions were Asians, white teenagers, and college graduates. Aside from earning more and having by far the highest labor force participation rate, college graduates had an unemployment rate (3.8%) less than half the overall figure. Kanye West is an outlier.

So the November jobs report is not bad, but neither is it all that good. The establishment survey’s 146,000 net new payroll jobs is nothing to sneeze at, but the household survey’s drop in the jobless rate to 7.7% is indeed a statistical artifact of the rise in the non-labor force population. The best that can be said about that is that no more than half of the rise was from unemployed workers dropping out of the labor force out of frustration. Is there good news on the horizon? Maybe. In an article in this week’s Wall Street Journal, the economists surveyed seemed optimistic about the labor market for 2013. Some factors: housing is finally recovering, state and local government job cutbacks may be over, consumer confidence is rising, and sectors like manufacturing and hospitality services are expected to continue hiring. Then again, economists are sometimes wrong.

(Just in case that link doesn’t work, the article is “Jobs Picture Should Brighten in 2013,” by Neil Shah, Dec. 3.)

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Tags: bls employment report, labor force participation rate, LFPR, u-6 unemployment, unemployment, van morrison