The Decline in Unemployment: Any Silver Lining?

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September 11, 2012

The Decline in Unemployment: Any Silver Lining?

Among the somewhat dreary jobs reported released last Friday, there was one potential bright spot'the unemployment rate declined from 8.25 percent in July to 8.11 percent in August. Of course, determining whether this is a true bright spot requires delving further into the numbers, and the determination depends on what happened to those people once they were no longer counted among the jobless. Did they get jobs? Some did, but an unusually large number of them simply left the labor force'the labor force participation rate hit a new post-1980 low, leaving some doubt about whether the cloudy employment report had any silver lining at all.

To detail the situation, the unemployment rate dropped from 8.25 percent in July to 8.11 percent in August, driven by a 250,000-person drop in the number of unemployed between July and August (a 1.95 percent drop). This is the largest decline in the number of unemployed since January 2011 and almost 2.5 times larger than the average monthly decline seen from July 2011 to July 2012 (103,500).

Where did those formerly unemployed people go? To get at this issue, I went to the Current Population Survey (or CPS, from whence the unemployment statistics come) to examine the flows of people into and out of the labor force, and into and out of employment and unemployment. From July to August, the CPS data in the chart below reveal that approximately 60 percent of the unemployed remained in unemployment (blue line). Of the remaining 40 percent, over half (54 percent) of the unemployed flowed out of the labor force in August (red line) while the other 46 percent (green line) flowed into employment.

It is interesting to note that the share of exits to employment fell below the exits out of the labor force for the first time in the last few months of 2008 and has remained so throughout the recovery.

Although the share exiting the labor force from unemployment has not increased, the number of individuals leaving unemployment because they leave the labor force has been on the rise since May, as the chart below shows:

This increase in the number of individuals exiting the labor force from unemployment, of course, leads to obvious concerns that lower unemployment may be a result of a rise in the number of workers who have simply become too discouraged to continue seeking employment. As financial writer Mark Gongloff points out:

The majority's reaction to these numbers on Friday was that they were an awful sign, that the job market is so bad that hundreds of thousands of people every month are simply giving up in despair. We have growing numbers of people sitting around doing nothing, losing their job skills and their ability to buy stuff.

Perhaps that's a bit too pessimistic. The U.S. Bureau of Labor Statistics (BLS) does track people who have dropped out of the labor force but who have looked for work sometime in the last 12 months and report that they are available work. The BLS also asks these individuals'referred to as the "marginally attached"'if they consider themselves as having left the job-search process because they are discouraged.

To begin with, it is important to realize the scale of the problem: the number of discouraged, marginally attached people corresponds to less than 7 percent of the unemployed and approximately 1 percent of those not in the labor force. More importantly, we can see from the reported data in the chart below that the share has been on a downward trend and is now close to prerecession levels.

If the share of nonparticipants who indicate they want to work but are discouraged is declining and relatively small, what about other nonparticipants? It's a good question, and in a previous macroblog post my coauthor Julie Hotchkiss discussed research presented in an Atlanta Fed FRBA working paper (coauthored with Fernando Rios-Avila) that attempts to get to this question.

First, we found that approximately 70 percent of those under age 25 indicate that the reason they are not in the labor force is because they are in school, a rate that has not changed with the rather dramatic decline in participation seen in the last decade and during the recession and recovery.

In prime working age'the cohort 25 to 54 years old'household care is the dominant reason individuals indicate they are out of the labor force. But in terms of changes in the numbers of people out of the labor force in this age group, we found significant increases only for the shares who indicated they were out of the labor force for schooling and for "other," or unspecified, reasons.

As Julie concluded in her earlier post, for those in school, the expectation is that they are accumulating skills and they will enter/reenter the labor force with higher levels of human capital. While there could be some concern over atrophy of skill for those individuals in the "other" category, the evidence suggests that for a large share of these individuals, the nonparticipation is not permanent, as roughly 45 percent of individuals in that category transition back into the labor force within a year'a rate that is increasing during the recovery.

A small ray of hope, perhaps, but hope nonetheless.

By Melinda Pitts, a research economist and associate policy adviser in the Atlanta Fed's research department

September 11, 2012 in Employment | Permalink

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