Misinformation spreads like wildfire on the internet. You may have recently heard that the workforce participation rate decreased by over 1 million in January, a "record drop." Some have gone as far as to claim that this was the cause of the drop in the unemployment rate. This is incorrect, and frankly, it's also quite ridiculous. Workforce participation actually increased in January, as workers reacted to the improving economic conditions.
Workforce participation did not drop. In actuality, the illusion of a drop was caused by the Bureau of Labor Statistic's (BLS) 2010 Census adjustment. This caused a population increase of 1.5 million people between December and January. BLS adjusted most of their numbers to correct for this distortion, but they failed to correct their workforce participation numbers. The Bondad Blog explains this in greater detail. BLS also explained this in their long release, though they could have headed this whole mess off by explaining it clearly in their news release. Will BLS's political incompentence sway the conspiracy theorists from their belief that the books have been cooked by political hacks? Probably not.
It is hard to blame people for their confusion. The unemployment rate is calculated by the Bureau of Labor Statistics by dividing the total number of unemployed persons by the total number of workers (seasonally adjusted), but it is not as simple as it seems. The BLS defines the "unemployed persons" as follows, and this is where it gets tricky:
"Persons aged 16 years and older who had no employment during the reference week, were available for work, except for temporary illness, and had made specific efforts to find employment sometime during the 4-week period ending with the reference week. Persons who were waiting to be recalled to a job from which they had been laid off need not have been looking for work to be classified as unemployed."
Using this definition, the regularly cited unemployment rate actually discounts many unemployed people. Some examples include retired people, disabled people, the long term unemployed, discouraged workers (the source of the workforce participation numbers), and frictional unemployment. You will often hear partisans allege that the government does this for nefarious reasons and in order to sweep the long term unemployed under the rug, but there is no evidence of that.
Some simple math proves the ridiculousness of the 1,000,000 number. If the economy added 317,000 jobs (257,000 in January + 60,000 in an upward adjustment from 2011) and 1,000,000 people shifted from "unemployed" to "discouraged," this would lower the unemployment rate be almost a full percentage point.
When you remove the distortion from the population change, the number of discouraged workers actually decreased by 0.3% between December and January (Hat tip, Calculated Risk).This actually makes sense. The economy is improving. Why would people drop out of the workforce?
The unemployment rate can be deceiving. For example, as discouraged workers gain confidence and rejoin the workforce, this will cause the unemployment rate to either increase or remain stagnant, despite an improving economy. The Congressional Budget Office recently predicted that the unemployment rate would increase to 9% this year for this very reason. In addition, as baby boomers begin to retire and remove greater and greater numbers of workers from the economy each month, this will also distort the numbers.
The unemployment rate is an imperfect measure of the U.S. economy, which should be measured using a holistic approach.
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