A lot is riding on the unemployment rate. Judged by political throw-weight, probably no economic statistic is more important in the next year. If it declines, people will feel better about the economy, bolstering President Obama’s reelection prospects. If it moves sideways or creeps up, Republicans will benefit. The jobless rate’s recent drop to 8.6 percent in November from 9 percent seems to give Obama a head start. But things are not as simple as they seem.
The news appears straightforward. The Bureau of Labor Statistics conducts two monthly surveys of the job market: one of households (they’re asked who’s working, who isn’t and who is looking for a job) and one of businesses (they’re asked how many people they employ). The unemployment rate is based on the household survey. It reported an increase in November of 278,000 people with jobs, pushing the unemployment rate down sharply.
But there’s a snag. If people stop searching for work, they’re not counted in the labor force or as unemployed even if they’d like a job. In November, some 487,000 people dropped out of the labor force, too discouraged — many analysts believe — to look for work. Adding these people to the officially unemployed would have produced a jobless rate of 8.9 percent instead of 8.6 percent, according to Heidi Shierholz of the Economic Policy Institute, a liberal think tank.
The payroll survey of businesses also raises doubts. It reported a jobs increase of 120,000 in November, less than half the employment gain of the household survey. And the increase was actually slightly below the monthly average for the previous year of 131,000. (There are often unexplained differences between the household and payroll surveys.)
Next year’s unemployment rate — and its political impact — will depend on two things: the strength of job creation, and the number of “discouraged” workers who leave or re-enter the labor force. The two will interact, sometimes strangely. Better employment prospects may spur more discouraged workers to look for a job. Perversely, this could raise the unemployment rate.
“If the job market improves, the labor force will grow faster,” says economist Gary Burtless of the Brookings Institution. “Some people who have dropped out will come back in.” Similarly, if job creation remains weak, more discouraged workers might stop looking for work. This could lower the unemployment rate.
One way or another, the effect could be large. Already, the poor economy has depressed the “labor force participation rate”: the share of those ages 16 and over in the labor market. Since 2007, it’s fallen from 66 percent to 64 percent. Though the decline may seem small, it represents about 4.8 million people. That’s in addition to the 13.3 million officially unemployed.
Burtless thinks that as many as 3.6 million of the 4.8 million people who have left the labor market might re-enter. But that’s a difficult estimate to make, as he notes, because there are three long-term trends that are also reducing labor-force participation.
First, as the population predictably ages, the share of working Americans already is inevitably declining. Second, the flood tide of married women into the workforce, while not dramatically reversing, has stopped. And, finally, some younger Americans (16-24) seem to be choosing to stay longer in high school, college and graduate school.
So the true state of unemployment is shrouded in a host of unknowns, except that everyone agrees that it’s too high. Is the rate’s recent drop real? Or will it turn out to be a statistical fluke? Could the unemployment rate give a misleading signal: rising if strong job growth lures more people into the labor market; falling if weak job growth causes more to quit looking and not be counted? These are all good questions with huge implications for the economy and politics in 2012. Stay tuned for the answers.