Mixed jobs report: How can the unemployment rate drop so much when the economy adds so few jobs?

Commentary about business and finance.
Feb. 4 2011 4:34 PM

Less Unemployment, Fewer Jobs

How can the unemployment rate drop so much when the economy adds so few jobs?

Job seekers line up to enter Choice Career Fair. Click image to expand.
What does January's lower unemployment rate really mean?

On Friday morning, the Bureau of Labor Statistics announced the unemployment rate for January, and the news was very good. The overall rate declined from 9.4 percent to 9 percent flat. In the past two months, the unemployment rate has fallen 0.8 percent percentage points—the biggest 60-day drop in more than 50 years.

It must mean that American businesses, finally confident that the recovery has taken hold and feeling flush after a good holiday shopping season, have decided to add workers. It must mean that jobseekers are facing less competition, and the labor market is stabilizing. It must mean that fewer and fewer Americans need unemployment insurance. By now, three years after the official start of the recession, things must finally be looking up.

Or not. To be sure, the economy is getting better. American businesses are creating jobs. The unemployment rate should continue to decline. But that .8 percent two-month drop is an example of how statistics can lie.

For one, job growth remains anemic, far below the rate the economy needs to keep up with natural growth in the working population—let alone bring about a drop in the overall unemployment rate. (The United States needs to add about 125,000 jobs a month to keep the unemployment rate stable.) The BLS reports that employers in January added 36,000 workers—about 720 per state. That's the smallest gain in four months, and far below the 146,000 jobs economists expected the economy to add.

The construction and transportation industries, hit by bad weather, used fewer workers. Local and state governments continued their slow bleed, taking 12,000 jobs out of the economy. Health care and education, two of the stronger sectors of the economy through the course of the recession and the recovery, added just a few thousand positions. The most sunshine came in factory employment, as domestic manufacturers added 49,000 workers, the biggest monthly boost since 1998.

So, what gives: How could the unemployment rate decline so much if businesses added so few workers? There are a few reasons for this puzzle wrapped in an enigma shrouded in a monthly jobs report.

First and foremost, economists never recommend reading too much into any one dispatch. The numbers tend to jump around quite a bit—in the preferred economic parlance, the data are "noisy." That is because the jobs survey is just that—a survey, not an actual report on the status of every American in the labor force. In the winter, the reports tend to be especially noisy, as factors like the weather and seasonal hiring influence the numbers. And especially strange things happen in January.

To understand why, it helps to know that the unemployment rate and the jobs growth figure are determined by two different surveys. To get the unemployment rate, federal workers visit and interview members of about 60,000 households, asking about careers and job searches and decisions not to work. This is called the household survey, or the current population survey. To get the sector-by-sector and job growth numbers, the BLS surveys businesses in something called the establishment survey.

The week businesses reported to the BLS happened to be the week of a massive snowstorm that battered the Midwest and a number of Southern states. About 886,000 Americans stopped heading into work—twice as many as in a normal January. That disturbed the data. The construction and transportation industries slowed during the storm—meaning the data for that week might not be representative of the data for the month. And the stormy weather perhaps also changed job search and hiring patterns. Economists believe this means the job growth number may actually be higher than reported or might tick up significantly next month.

The decline in the unemployment rate, on the other hand, might be exaggerated—and, one way or another, is not easy to parse in the context of December's numbers. For one, the BLS revised its estimates of the unemployment situation in December and November. It now believes that employers added more jobs in those months than previously thought: 121,000 positions in December, up from 103,000; and 93,000 jobs in November, up from 71,000. That perhaps accounts for some of the very steep drop.

Other one-off changes need to be accounted for as well. In January, the Labor Department adjusts its estimates of population size, meaning December and January can't be fairly compared in the same way November and December can. According to the BLS, between December and January, the number of employed workers increased by 117,000, but the number of unemployed workers fell by a massive 622,000. That implies that discouraged jobless workers simply fell out of the labor force—but the BLS says the size of the labor force did not change. In short, the numbers do not add up terribly well, at least not this month.

We'll know more in February and March, when there may be further adjustments to the numbers released today and when month-to-month data become easier to compare. But one way or another, the employment situation is not good. There are fewer Americans with jobs now than there were in January 2000—though there are 11 million more workers now. End of story? We're still digging ourselves out of a very deep hole.

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