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December 15, 2011

Unemployment in Context
By Eric Przybylinski, CAIA, Senior Research Analyst


In the most recent November employment survey, the unemployment rate fell significantly further than expected, to 8.6%. This seeming improvement, however, masks continued weakness in economic growth. Calls for a U.S. recession now seem premature, but, so too do calls for a return to robust growth. In November, the economy added an estimated 120,000 jobs. This is roughly the number of jobs that must be added each month to simply keep pace with population growth. Thus, the majority of the improvement in the unemployment rate came from a decline in labor force participation, shown in the Labor Force Participation chart.

The labor force participation rate measures the number of people who are employed or seeking employment as a percentage of the total population. Notably, the participation rate has increased over time as more women have joined the workforce. Currently, the labor participation is at the same level as during the double dip recession of the 1980’s. Improvements in the unemployment rate due to a decline in the participation rate imply little relative improvement in a country’s economic condition. Ultimately, either participation stays low, which permanently lowers output potential, or participation increases as the economy improves, which increases the unemployment rate.

Due to the long duration of unemployment after the most recent recession, more workers may continue to drop out of the labor force. This makes the unemployment rate a less relevant measure of the output gap between the economy’s current and potential output. Ideally, for robust growth to take hold, the number of jobs created would have to be in excess of those needed to keep up with population growth. In this scenario, there may or may not be a decrease in the unemployment rate, depending on how the participation rate changes. However, there would be an improvement in the employment to population ratio. This measure, in the Employment to Population Ratio chart, has languished at depressed levels since collapsing during the most recent recession.

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