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Monthly jobs report for December: Unemployment drops as workers quit searching

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On Friday, January 10 the U.S. Bureau of Labor Statistics released the monthly report on the U.S. labor force. Despite the announced drop in the unemployment rate to 6.7 percent for December, the lowest it has been in five years, this report does not point to a stronger labor market.

Looking beyond the surface of these numbers, it is clear that much of the drop in unemployment in December is the result of many of the unemployed becoming so discouraged at the prospect of finding a job that they just gave up. To be counted as unemployed in the survey used to measure the unemployment rate, it is necessary to have searched for work at some time in the four weeks preceding the survey. But many of the unemployed have been searching week after week and have been looking for a job from the same employers in their local labor market over and over again. Not landing a job week after week, and in some cases month after month, causes some of them to give up the search. Not having searched for work causes them to be counted as ‘not in the labor force.’

Let’s look at the numbers in the jobs report in some detail. First, the United States civilian population aged 16 years or older grew by an estimated 178,000 in December. But the size of the United States labor force among that population group dropped by 347,000. When the labor force grows by less than the population it is not a sign of a strong or improving labor market. In this case, not only did the size of the labor force not keep up with the population increase, it actually fell. The result can be summarized by the ratio of the labor force to the population, which fell in December to 62.8 percent, down from 63 percent in the previous month.

Why did the size of the labor force decline so in December? At this point, it is not certain and we cannot know until more data become available so labor market analysts can take a good look at what happened. But one likely reason is that many potential workers simply looked at the likelihood of finding a job and decided the chances were nil and so did not look for one. Some evidence of this is that there were 32,000 workers who entered the labor market in December but could not find a job and were counted as newly unemployed. At this point one can only speculate how many potential new entrants to the labor market decided it wasn't even worth a try at finding a job.

Another piece of evidence is that the number of unemployed for 27 weeks or more dropped by 166,000 in December. One can only hope that many of these individuals finally found a job, but the reality may be that many of them simply gave up looking.

Finally, the report from employers based on their payroll data from which we get the much publicized monthly jobs numbers show an increase of 74,000 jobs in December, a number much lower than economists had expected and much lower than the 200,000 plus jobs added in each of the previous two months.

All in all, this is not a jobs report that indicates a labor market on the mend. We can only hope it is a temporary pause in a labor market recovery that will begin to surface again in the January numbers to be issued next month.