Why the unemployment rate is dropping

Jan 06, 2012

The nation's gloomy jobs picture continued to brighten in December as employers added 200,000 jobs, pushing the unemployment rate down to 8.5 percent, the Labor Department reported Friday.

But what actually caused the unemployment rate to drop? How is the unemployment rate is calculated?

To answer your questions, we've called in an expert. Live chat with Dean Baker of the Center for Economic and Policy Research about the unemployment rate, including its accuracy, the policies that might have affected it and more.

Related: U.S. adds 200,000 jobs in Dec; unemployment drops to 8.5%

Hi everyone, This was a slightly better jobs report than expected, but we have a very long way to go to get the economy back on track.

Why is unemployment rate dropping?

I think it is mostly a statistical fluke. We have to create 90k to 100k jobs a month to keep pace with the growth of the labor force. The average over the last three months has been about 150k, this would be enough to at most lower the unemployment rate by 0.1 percentage point.


I expect the unemployment rate to edge upwards in the next few months.

How much effect do early baby boomer retirees have on unemployment rate statistics? I could see in some cases they make place for new hires, but also end up vacating positions slated for downsizing through attrition.

I think many baby boomers are delaying retirement. They have lost much of their wealth with the collapse of the housing bubble and the plunge in the stock market. In fact, the one age group that has seen substantial growth in employment over the last 4 years is the over 55 group. People cannot afford to retire.

How does our unemployment rate compare to Canadian rates as well as Euro countries.  Is it calculated in a similar fashion. Does the size of our prison population and military have much bearing on these numbers?

The Canadian rate is around 7 percent. The rate in most West European countries is much lower. In Germany it is 5.5 percent. Sweden and Denmark around 7.0 percent. Netherlands around 5.0 percent. Italy around 7.0 percent. Spain is through the roof at 21 percent. Greece, Ireland and Portugal are in double-digits.

As a basic rule, the countries with the strongest welfare states are doing the best right now. I wouldn't say this is cause, but that is what the numbers show.

What's you expectation for employment over the next 6-12 months?

I expect the unemployment rate to trickle upward over the next few months, just reversing a statistical fluke and then edge downward over the course of the year. My bet is that we are still over 8.0 percent next Dec.

Any credence to the idea that the employees who postponed retirement for a few years are now retiring? Employees have done more with less co-workers but eventually the baby boomers do retire with full Social Security benefits.

not that I can see, we are still seeing rapid growth in employment for the over 55 group. also, their money has not come back

What percent of these new jobs are related to manufacturing? How much to tech?

Manufacturing added 23,000 jobs in Decemeber. That was good news, but it added almost zero in Nov. My guess is that we are seeing modest growth in manufacturing (10k-15k a month). At that pace it takes a long time to make up 2 million lost jobs.

Tech is not showing up as much. This would be the information sector -- that's pretty flat.

It seems there is always a caveat to a positive jobs number....IE) Today's surprise was that gains were due to seasonal hiring in December, earlier this year jobless rate declined but caveat was that it was due to discouraged workers leaving, etc. Under what conditions, do we get a number like today's and just make the conclusion that things are significantly improving? IE, a caveat-free report?

You have to look at the numbers closely. First, it is important to remember that even 200k is not especially good. The economy averaged 250k a month for 4 years at the end of the 90s. Coming off the bad recessions in 74-75 and 81-82 we were creating well over 300k a month. So, we should not allow ourselves be pushed into accepting 200k as the best we can do. It is very far from it.

How much of the drop in unemployment rate in December be attributed to temporary seasonal holiday employment?

I think it was just a statistical fluke. Normal seasonal changes, like holiday hiring, get included in the seasonal adjustment. We had some peculairities that cannot be explained by normal seasonal patterns.

I bet that we get a jump to 8.7 or 8.8 percent next month. you get to laugh at me if I'm wrong.

What can we do to help the rate come down now, and keep it down? What are some policies you would recommend?

In the short term, govermnent spending will do the trick. We have lots of needs, infrastructure, education, home health care, that need to be met. I would also have a teen job program. They horrible unemployment rates. What's te downside to paying teens to clean up streets and parks and board up abandoned buildings? These kids will not find jobs otherwise.

The Fed can do more. It can have more active monetray policy to push real interest rates even lower.

We should also look to promote more work sharing. As it stands the government effectively pays people to be completely unemployed with unemployment insurance benefits. Why not pay people to work shorter hours.


In other words, if an employer lays off 10 workers, they all get half pay from unemployment benefits. Instead, we can reduce the hours of 50 workers by 20 percent and have the government make up half of the lost pay. It seems like an obvious win-win.

Germany has gone this route and gotten its unemployment rate down to 5.5 percent even though its growth has been no better than ours.


Finally, we should get the value of the dollar down. This will reduce our trade deficit. It must be done and better sooner than later.

Who should get the credit for the unemployment rate coming down, - the Democrats who passed all of that legislation, which stimulated jobs,  or the Republicans who blocked a lot of legislation, therefore saving the country money and creating jobs?

There ain't much credit to be gotten here. This is a horrible recovery. But the Dems definitely deserve more credit than the Rs.  Saving money is not going to create jobs. I keep looking for the employer that is hiring people because the government cut spending on home heating oil assistance or Medicaid. I haven't found one yet.

Basically the Republicans are saying economic nonsense. I assume that their leaders know this, but it seems to sell politically.

Does it seem like this is happening routinely ever since the financial crisis: one unemployment figure gets announced, and then a few weeks later it gets quietly revised to a worse figure. Revisions are to be expected, but it seems like they're always in a bad direction, raising suspicions that the original figures are are still being doctored to look unnaturally good.

i follow this stuff pretty closely. I don't think you'll find the revisions have all been one way. In fact, this month's jobs numbers included small upward revisions to both October and November's data.

As a rule, i think the government statistical agencies are remarkably honest. I have had some serious criticisms of them on various issues, but I have never seen them do anything that I thought was purely political.

Are there any economic policies that (1) won't be vetoed by congress and (2) will improve employment?

President Obama could push more to get the dollar down. The key actor here is China. I don't believe that he has really pushed very hard on this.

The issue here is that we have to be willing to give up something in exchange for a lower dollar.  We can tell them we don't care about market access for Goldman Sachs or royalties for Disney and Microsoft. I would consider that trade-off for a lower dollar a very good deal for America's workers.

Around half the growth was accounted for by Transportation (50K), Health Care (29K), and Leisure (21K), Health Care will continue growing to support those of us on Medicare, however, how likely is the growth in Trans and Leisure to continue post holiday?

The transportation was a fluke. There were 42,000 courier jobs created in Dec. The same thing happened last year. They all disappeared in January. The same thing will happen this year. it is unbelievable that so many economists and economics reporters missed this one.

I don't mean to nitpick, but a rise to 8.7 or 8.8 percent unemployment rate next month wouldn't really be a "jump". We do often see the number reported as if each tenth of a percent is significant, but statistically, I believe the 90% confidence interval for the unemployment rate is somewhere around 0.2 percent in either direction.

8.5 to 8.7 is 0.2 pp, if we get to 8.8 percent we're talking 0.3 pp. Anyhow, I don't mean to say that it would be a jump because the economy is deteriorating, this is random movements in the data -- that is my point.

Would a stronger safety net improve the unemployment situation? And if so, can we afford it?

yes, at least that seems to be the experience of western Europe. There is a simple story you can tell in which countries with weaker saftey nets do better during the boom times, but worse in the bad times. Supporting workers in bad times is of course the point of the safety net.

How big is the "baby-boomer-retirement" effect? How many of the persons previously counted in the unemployment numbers are now receiving Social Security benefits instead, both normal retirement and disability?

I don't think we are seeing too much of this yet. The Congressional Budget Office puts the rate of labor force growth at just 0.7 percent (1 million  workers a year). It had been aroun 1.0 percent ten years ago. This reflects a greater rate of retirement as well as the ending of the rise in women's labor force participation.

Would relaxation of intellectual property laws (music, pharma, etc.) help employment? Would relaxation of licensing laws (doctors, lawyers, beauticians, etc.) help employment?

Yes, the first would mean lots more money in people's pockets. If we could get all drugs at generic prices, we would save close to $250 billion a year. Imagine the payroll tax cut times two.

In terms of relaxing licensing requirements, this would have the same effect, but it would be over a longer time frame. One quick number, if we paid our doctors as much as Europe pays its doctors it would save us around $90 billion a year. Think of this added cost of physicians due to protectionism as the "doctor tax." It's much more than we spend each year on welfare and fodd stamps.

Do you know how many of the new positions are filled by internationals and how many by locals?

I don't know of any good data on this -- we do have employment numbers for foreign born and native born, but I don't think that is exactly what you're asking.

Why is the rate dropping? Are these temporary jobs or permanent? 

The key point in my view is that the unemployment rate really is not dropping much. if we look at the other side, the employment rate (the percentage of the population who are employed) it is only 0.4 percentage points above its low for the downturn. We have made up very little ground since the worst of the downturn.

Rather than saying why things are improving, I am more concerned about why they have not improved a hell of a lot more than they have. All the projections back in 2009 were that the economy would be much stronger by now.

Are employment figures seasonally adjusted? If so, why wouldn't seasonal increases in couriers be adjusted out?

There has been a change in seasonal patterns. The big issue here is that we have much more e-commerce. That means more people getting hired to handle holiday purchases from Amazon and the like.

Economists who follow the economy should be on to this -- but hey, they missed an $8 trillion housing bubble, so what do you expect?

Would NGDP targeting help employment? Inflation targeting?

Yes, this would mean a much more expansionary monetary policy from the Fed. Basically we should be trying to get all the policy engines fired as much as possible right now. If fiscal stimulus is blocked for political reasons then we should look to monetary policy.


btw, the states can do more work sharing through their unemploymenet insurance programs. They have lots of leeway -- they should use it.

then you'd have even fewer doctors. we're already seeing fewer doctors, and many in rural areas who have little to no access and even in big cities *one* doctor in certain specialties. It is hard to become a doctor - and they deserve to earn A LOT of money. I don't find it horrible they earn what they do - they work hard, and they have over a DECADE of training. wow.

You're always free to give your doctors a tip if you want them to have more money. I don't want the government interferring with the market to prop up doctors' pay. We can't afford it. If the doctors don't like it -- too bad.

What do you consider the most relevant employment statistics - some unemployment variant, employment/population ratio, other?

I like the employment to population ratio  because it gets around the problem that people often drop out of the labor market when they can't find a job. That can mean that the unemployment rate falls just because people gave up looking for work.

Will the job openings rate and the quits rate increase now that employment has increased?

Quit rates were actually reported as falling in Dec, which is one reason I was not thrilled with this report. We have seen a small increase in job openings since the summer, but not really much to get very excited about.

What percent of my unemployed neighbors have actually found real jobs?

I'm afraid that i don't know your neighbors, but probably not many.

Might an announced blip in employment, even if a statistical fluke, lead people to spend more and business to expand, therefore leading to a real increase in employment?

I think the role of confidence is hugely exaggerated. It does matter, but it is not that fickle. In terms of consumers, people are actually still spending at a very high rate given that they just lost $8 trillion in housing bubble wealth. Investment in equipment and software is back at its pre-recession share of GDP, which is pretty impressive given the excess capacity in many sectors.  So, i don't see confidence as being a big issue.

My main concern about people exaggerating the strength of the economy is that they get the idea that we don't have to do anything to further boost it. Things will change back when we get the January and Feb. data, but it takes a long time to build momentum for action.


What's your take on the idea of lowering the Social Security age? It MIGHT open up some job positions that would be filled by those currently unemployed, and would make taxpayers out of a lot of the youth. This forum is too limited for many other advantages I see. But what's your thought on this?

I'm not thrilled by lowering the SS age. My concern is that many people are already retiring with too little money. I don't want to encourage more people to fall into a situation where they really strectched in their old age. I would rather see us focus on shortening workweeks, which Germany and other European countries have done very succesfully.

It seems like young people and the near-retirees have been hit the hardest in this recession. Why not temporarily reduce the retirement age for Social Security and Medicare and temporarily increase the benefits to encourage the older folks to retire?

my concern (in the last question) is that we would encourage people to retire with too little money. I would love to see us lower the Medicare age as a matter of long-term policy even if it is just allowing 60 year olds or 55 year olds to buy in.

Okay, I guess we're out of questions. I'll head home -- thanks folks.


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Dean Baker
Dean Baker, an economist and a co-director of the Center for Economic and Policy Research, is the author of The End of Loser Liberalism: Making Markets Progressive.
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