Friday, August 7, 2009

Unemployment Rate Drop = Decline in Labor Force

The country shed another ~250k jobs in July, but the unemployment rate dropped to 9.4%. How is that? It looks like individuals have left the labor force.

Month over Month Change (S.A.)

How does this work? The numerator in the unemployment rate is unemployed... the denominator is labor force. Simplified example:

  • 19 people are unemployed out of 200 in the labor force = 9.5% unemployment rate
  • 1 of those unemployed individuals leaves the labor force
  • 18 people are unemployed out of 199 in the labor force = 9.0% unemployment rate
This also explains why the percent of those unemployed decreased at a greater rate than the labor force (1/19 = a 5.2% drop in the # unemployed, but 1/200 = a 0.50% drop in the labor force).

So, was the data better than expected? Absolutely (good to great news on a relative basis), but lets make sure we understand the math... and the continued trend.

Employment as a Percent of Entire Population

Source: BLS