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U.S. Unemployment rate in black and white

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America’s recent unemployment data has not exactly been the easiest to interpret: While the unemployment rate sank nearly half a percentage point to 6.3 percent in April, the reality on the ground does indicate that the American economy is yet to attain a tolerable pace of job growth.

When people talk about the unemployment rate, they are simply referring to the share of the labor force (eligible workers) who are looking for work but cannot find it. In a broader sense, no single number captures the health of the U.S. economy than the unemployment rate: a decreasing unemployment rate means an improving economy as more people are finding jobs. In contrast an increasing unemployment rate indicates that the country is heading towards a recession as more people are out of work, less people are spending, and the business sector is declining.

A new data released by the U.S. Bureau of Labor Statistics(BLS) on May 4 revealed a sign that the U.S. economic expansion is on the verge of speeding up: The economy added 288,000 jobs in April, which marked the biggest upside surprise since February 2012 and followed 203,000 rise in March. The unemployment rate fell from 6.7 percent recorded in March to 6.3 percent(Bureau of Labor Statistics, 2014; Jamrisko, 2014). The release of these numbers blew away economists’ gloomy forecasts about the economy, and it is not surprising that stock prices rose following the news, since the numbers sent an upbeat message about America’s recovery to the investors.

The beauty of numbers

The recently released unemployment rate, which comes from a survey of households, revealed one additional important fact: the number of eligible individuals joining the labor force has declined and fewer people now report they are jobless, implying that people has either stopped looking for jobs or have left the job market for other reasons(such as retirement). According to the available published evidence, it is these trends that caused the unemployment rate to go down to 6.3 percent, which is lowest level recorded since the September of 2008(Kurtz, 2014; Prial, 2014).

Judged from this perspective, it can be inferred that the unemployment figure released by the BLS may not necessarily be a great news as such. Generally speaking, people who are no longer looking for a job are not counted as part of the workforce and hence are not included by the U.S. Labor Department as participants of the survey used to determine the unemployment rate. This, more than anything else, pushed the unemployment rate lower because many thousands of unemployed Americans are not counted as such, an outcome that masks the fact that all those people are still out of work. In other words, given that the last recession ended about five years ago, it should be recognized that this simple dynamic has been a primary factor in driving the unemployment rate lower.

Meanwhile, the key gauge of the percentage of working-age Americans currently employed or actively seeking a job – known as the labor force participation rate – fell to 62.8 percent. This valued matched the lows hit in December and October of last year, which, according to independent studies , had not been seen since March 1978(Prial, 2014). It should be noted here that the labor force participation rate considers all working-age Americans, and a significant amount of this demographic group are actually not working these days. Thus it is different from the unemployment rate, which provides a count of the number of people who are either working or looking for work. What is certain is that, while the headline unemployment rate is, to some extent, a good indicator of the broader health of the U.S. labor market, it can sometimes produce biased results.

Taste of ashes

While the monthly labor reports provides a general snapshot of the overall job situation, the central problem of the U.S.’s post-recession recovery is the inability of the labor force participation rate to rise despite signs of momentum across the rest of the economy. The key reasons for the low participation rate are twofold. First, frustrated job seekers are leaving the workforce in droves after months of unsuccessful job search. Second, a large number of baby boomers are reaching their retirement age and are dropping off the labor force.

In economic parlance, the first reason is known as structural because it means that something is broken in the U.S. economy and needs to be fixed to ensure that job seekers can become gainfully employed within the shortest possible time. The second reason, on the other hand, is known as cyclical since it is a result of a demographic trend, which will eventually play itself out. The economists in U.S., particularly those of them who works for the Federal Reserve, are still searching for the factor (among these two) that has a more dominant impact with respect to pushing people out of the workforce.

In view of this, many large U.S. businesses such as banks and other similar institutions, who are in desperate need for survival and profitability, seems to have adopted a strategy of keeping costs low by maintaining minimal payroll levels or by cutting more staff from their payroll. While this approach can be a strategic priority for the affected firms, it does make it very difficult for the job seekers to find full-time jobs, and could keep it that way for a longer time than is necessary.

References

Bureau of Labor Statistics(2014): Databases, Tables and Calculators by Subject. Retrieved May 4, 2014 from http://data.bls.gov/timeseries/LNS14000000

Jamrisko M.(2014): Hiring in U.S. Kicks into Higher Gear As Unemployment Rate Falls. Bloomberg. Retrieved May 4, 2014 from http://www.bloomberg.com/news/2014-05-03/hiring-in-u-s-kicks-into-higher-gear-as-unemployment-fal.html

Kurtz A.(2014): Hiring is Up in April, Unemployment Down. CNN Money. Retrieved May 4, 2014 from http://money.cnn.com/2014/05/02/investing/april-jobs-report/

Prial D.(2014): Big Downside to April Job Report. Fox Business. Retrieved May 4, 2014 from http://www.foxbusiness.com/economy-policy/2014/05/02/big-downside-to-april-jobs-report/

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