Friday, December 2, 2011

Why The Reported November Drop in Unemployment Rate is Too Good To Be True

The drop in the topline unemployment number by 0.4% to 8.6% seems like great news at first glance. However, the U.S. only added 120,000 new jobs during the month. It requires 95,000 new jobs per month just keep up with population growth. There is a huge fudge factor, the participation rate. Thus, by lowering the participation rate, the Bureau of Labor Statistics can make a mildly positive number appear to be spectacularly good.

  • In November, those "Not in Labor Force" rose by a staggering 487,000. Those not in the labor force were not counted as unemployed.

  • It the participation rate were held constant, the unemployment rate would be well over 11%.

  • As shown in this chart from The Market Ticker, the unemployment rate as a percent of the population remains at depressed levels

    Thus, the unemployment rate is disconnected from the number of employed workers paying taxes. Given that average hourly earnings decreased by 2 cents, or 0.1% to $23.18, this increase in employment will only have a mildly positive impact on tax revenues. And even generating this modest gain in employment was only achieved via an immense amount of fiscal stimulus via deficit spending by the Treasury (about $100,000,000 in an average month). No question, this is a positive report, but don't put to much credence in the supposed 0.4% drop in the unemployment rate.

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