Unemployment rate hinges on more than job gains
WASHINGTON—For most people, the 8.3 percent unemployment rate is the most visible sign of the economy's health. The rate's every movement is closely watched, especially in an election year.
But when the rate declines, it's not always because many more people were hired. The unemployment rate can rise or fall even when no jobs are created or lost.
Last month, the rate fell because jobs were added. But that hasn't always been the case in the 2 1/2 years since the Great Recession ended. One reason for the rate's decline is that fewer people are looking for work.
The unemployment rate counts only people who don't have a job and are looking for one. Once you stop looking, you're no longer considered unemployed.
In January, the number of people either working or looking for work -- who collectively form the labor force -- rose. That's an encouraging sign. It suggests that more of the unemployed were optimistic about finding a job.
The situation has shifted over the past year. The labor force has grown. But it hasn't grown as fast as the overall population. The result: The proportion of the population either working or seeking work has fallen from 64.2 percent to 63.7 percent. That's known as the labor force participation rate.
That drop is a big reason why the unemployment rate has declined in the past year.
People start and stop looking for work for varying reasons. Some return to school. People retire. Immigration can slow. In tough economies, people who were looking for work become discouraged and stop. That's what happened during and after the Great Recession.
The first retirements of the vast baby boomer generation helps explain why the labor force participation rate is declining.
The government tracks unemployed people who have given up looking for work in the past year. It calculates that if they were still job-hunting, but hadn't found work, the unemployment rate would have been 8.9 percent last month.
That figure is much higher than the unemployment rate of 8.3 percent. But like the unemployment rate, it's dropped sharply over the past year.
Because many factors can skew the unemployment rate, economists find that a better way to assess how much hiring is going on is to simply follow the number of jobs created each month.
The monthly job gains and the unemployment rate are reported in separate surveys. The job gains come from a survey of employers. The unemployment rate is calculated from a survey of households.
Last year, the economy gained 1.8 million jobs, the employer survey found. That's an improvement over 2010's gain of about 1 million.
The rate of job creation is accelerating. Employers have added an average of 201,000 jobs a month for the past three months. That's much better than the average of 152,000 a month last year.
If the economy keeps gaining jobs, more people who have stopped seeking work will likely start looking again. And if many of them can't find jobs, the unemployment rate could rise. So far, that hasn't happened.
Most economists think there will eventually be a rebound in labor force participation, which would likely raise the unemployment rate. But it might take more hiring before any such rebound kicks in.