Unemployment Rate Drops–Then Where Are the Jobs?

Yesterday the Labor Department reported that the unemployment rate dropped from 9.0% in October to 8.6% in November. So, does this means nirvana is just around the corner?  Are our problems are over?  With .4% drop per month, will we be below 5% unemployment in under a year?  Wow.  If only this were true.

The unemployment rate is determined by the Labor Department’s household survey.  The government takes a survey and asks how many are unemployed and that becomes the reported rate.  Unfortunately the hard numbers tell a different story.  About 102,000 jobs were created last month according to the Department.  But just to keep up with the population increases, over 200,000 jobs need to be created every month.  So, basic math says that the unemployment rate hasn’t decreased.

According to Neil Dutta, US Economist at Bank of America Merrill Lynch, “When the unemployment rate declines, we want to see both employment and participation increase as discouraged workers return to the labor force. Today, we got the former, but not the latter, making the 0.4 percent drop look a bit suspect.  We would not be surprised to see the unemployment rate give back some of its decline in the coming month(s).” (http://www.cnbc.com/id/45521793)  According to CNBC, “Claims for unemployment insurance unexpectedly rose last week, climbing past the psychologically important 400,000 mark as the jobs market showed signs of more weakness.” (http://www.cnbc.com/id/45506837/)  This obviously doesn’t support a falling unemployment rate.

Over 310,000 people left the labor force last month thereby dropping out of the number counted as unemployed. (http://finance.yahoo.com/news/jobless-rate-drops-8-6-133402269.html?l=1/)  These include women who previously worked as well as early seniors who have simply given up hope of working and slipped into unintended early retirement. Further, a large percentage of the 102,000 jobs gained last month were seasonal retail jobs that likely are temporary

Let’s look at it another way.  The unemployment rate in 2006 and 2007 was 4.6%. (http://www.bls.gov/cps/prev_yrs.htm/)  According to Edward Glaeser (Glimp Professor of Economics, Harvard University), “Since 2007, the number of employed Americans has fallen by 7 million.” (http://www.hks.harvard.edu/centers/rappaport/events-and-news/op-eds/more-americans-need-to-work-and-to-marry/)  Clearly this is not good.  Regardless of year-over-year or month-over-month changes, 7 million fewer people are working than just a few years ago.  Reports suggest that people have grown discouraged and taken themselves out of the workforce and so are no longer reporting themselves unemployed.  At 102,000 new jobs per month, it will take until 2017 to get back to the employment level of 2007!

As an aside, there are about 140M people employed in this country (http://www.bls.gov/news.release/pdf/empsit.pdf).  That’s only about 45% of our 312M population.  63% of the population or 197M people are between the ages of 18 and 65.  So only 71% of the working aged population is employed.  That’s a lot of unproductive people and a huge waste of human resources.

So what conclusion should small businesses derive from these new data?  The economy remains sluggish, unemployment remains very high, 7 million fewer people are employed versus a few years ago, and there is no short-term catalyst for economic growth.  Small companies should be cautious, pay attention to cash flow, and continue to wait for sunnier days to take investment risk.

— Steve Odland

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