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Jobs decline, jobless rate drops: Does unemployment rate tell us everything?

Mike Walden

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Editor’s note: North Carolina released its latest county-by-county and metro area unemployment statistics Friday. The numbers showed slight improvements in virtually all areas, but NCSU economist Dr. Mike Walden told Local Tech Wire and WRAL.com that they represent a “false hope.” The job environment is actually worsening because more people are giving up looking for jobs and those are no longer counted among the unemployed. In the following commentary, Walden explains his argument.

RALEIGH, N.C. - One of my favorite leisure time activities – when I do have any free time – is to read a good mystery, or maybe watch a re-run of an old Columbo TV show. I think mysteries are great fun as well as good ways to stimulate my aging brain cells!

So here’s a mystery for you to ponder. In March, North Carolina lost over 33,000 jobs (based on the household survey of employment). This was almost twice as many as the 17,000 job cuts in February. Yet while the February unemployment rate jumped a full percentage point (from 9.7 percent to 10.7 percent), the rate in March rose only one tenth of a percentage point – from 10.7 percent to 10.8 percent.

Yes, you read that statement correctly. Twice as many jobs lost resulted in one-tenth the rise in the unemployment rate. Clearly, this doesn’t make sense. Were the books cooked, or is there something else going on with the unemployment numbers?

Let me assure you the books weren’t cooked. North Carolina’s unemployment numbers come from a federal government survey conducted each month by professionally trained and experienced Census Bureau employees.

Instead, something else is going on and it has to do with how unemployment is measured. But before I reveal the answer, a little background on the concept of unemployment is needed.

When we say someone is “unemployed”, I think you’ll agree we don’t want to include everyone who doesn’t have a job. Certainly people like my wife, who is retired, shouldn’t be counted as unemployed because she doesn’t want a job. Likewise, we don’t want to include children or people who are institutionalized (for example, in a correctional institution or nursing care facility) as unemployed. In fact, all these folks are counted as neither unemployed or employed – that is, they’re simply not counted as part of the labor force.

But what about someone who wants to work but doesn’t have a job? Here’s where things get tricky and the solution to our mystery begins. To be counted as unemployed, the federal government requires someone to be out of work and actively looking for a job. What does it mean to actively look for a job? It means the person would need to have contacted an employer, employment agency, or friend or relative about a job, or have sent out a resume, completed an application, or engaged in some other active job search within the past four weeks.

If the jobless person has done any of these things in the past month, then they are counted as unemployed. But if they haven’t, then they are not counted as unemployed. Indeed, they are not even counted as part of the labor force. They would be lumped together with my retired wife and everyone else who is not in the job market.

Now we can solve the mystery of North Carolina’s unemployment rate in March. While the number of people with a job fell by 33,000 in March, the official number of unemployed persons increased by only 2400. So what happened? The answer is that about 30,000 people were dropped from the labor force, which is exactly what the numbers show. Some of the 30,000 without jobs could have left the state. The others are people who previously lost their jobs but did not meet the requirement of actively looking for work, so they weren’t counted in the ranks of the unemployed.

Economists have a name for unemployed persons who are not going on job interviews and not sending out resumes and therefore aren’t classified as unemployed. We call them “discouraged workers,” and they can cause strange things to happen to the measured unemployment rate, as we saw with North Carolina in March. Studies show discouraged workers – if counted as unemployed – can add between one-half and a full percentage point to the official unemployment rate.

Discouraged workers can also confuse the unemployment rate when the economy begins to improve. When things are looking up and businesses are hiring, discouraged workers tend to come back into the labor force and start to again actively look for work. However, until they land a job, they are counted as unemployed. This situation can cause the unemployment rate to rise just at the same time that the number of jobs is increasing!

This is why many economists – including myself – say the best way to gauge the job market is to simply track the number of jobs. Focusing on the unemployment rate ties you to the particular and strict way unemployment is measured. And I think, you’ll now decide, that measuring unemployment is more than meets the eye!

About the author: Mike Walden is a William Neal Reynolds Distinguished Professor and Extension Economist in the Department of Agricultural and Resource Economics at North Carolina State University who teaches and writes on personal finance, economic outlook, and public policy.