Americans woke up Friday to the good news that the unemployment rate had dropped sharply from 9% to 8.6%. On closer inspection, the decline is highly questionable — and doesn’t warrant a surge in optimism.
The White House hailed the news as “further evidence that the economy is continuing to health” and proving the $447 billion stimulus proposal “is the right medicine” for what ails us. Some in the media likewise saw good news, with headlines such as the Boston Globe’s “Unemployment Drops To Lowest Since 2009.”
We’re not trying to be Grinches, but the decline in the unemployment rate is highly suspect for many reasons.
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The number is derived from a huge survey of 60,000 households the government takes each month. In November, the survey showed the labor force shrank by 315,000. That shrinkage makes the unemployment rate look a lot better than it is.
This is questionable because in the previous three months, the labor force increased by 323,000 workers on average. Statistically, a one-month reversal in the size of the workforce of more than 600,000 people just doesn’t make sense — unless an awful lot of people threw up their hands in disgust and quit looking.
And that’s what seems to be the case. The labor participation rate declined to 64% from 64.2% a month before. Usually, it rises when jobs are growing as people rejoin the labor force.