Why Did the Unemployment Rate Drop?

Posted by Christopher Lihzis

The U.S. unemployment rate dropped to 8.2% in March and a broader measure dropped to 14.5% from 14.9% the prior month, but a separate survey noted that the economy added a paltry 120,000. Why the drop?

This month, the decline in the jobless rate wasn’t a positive sign, as it primarily came from people dropping out of the labor force. The unemployment rate is calculated based on people who are without jobs, who are available to work and who have actively sought work in the prior four weeks. The “actively looking for work” definition is fairly broad, including people who contacted an employer, employment agency, job center or friends; sent out resumes or filled out applications; or answered or placed ads, among other things. The rate is calculated by dividing that number by the total number of people in the labor force. When the unemployed no longer count as part of the labor force, both numbers decline and the unemployment rate falls.

In March, the number of unemployed dropped by 133,000, but so did the number of people employed — by 31,000. That indicates that those people didn’t necessarily find new jobs, since the overall labor force declined by 164,000.

When people leave the labor force it could be due to discouragement of the long-term unemployed or by choice over retirement or child care. The labor force has dropped dramatically over the course of recession and recovery, and concerns have been raised it was due to discouraged workers.

To be sure, the moves in the household survey are volatile. This month’s numbers are a deviation from the trend so far this year. January and February saw workers returning to the labor force, and strong growth in the number of people employed. This month could just be payback for recent strength in the survey.

Meanwhile, the broader unemployment rate, known as the “U-6″ for its data classification by the Labor Department, dropped by 0.4 percentage point last month and has declined by more than a full percentage point in the past year. The U-6 figure includes everyone in the official rate plus “marginally attached workers” — those who are neither working nor looking for work, but say they want a job and have looked for work recently; and people who are employed part-time for economic reasons, meaning they want full-time work but took a part-time schedule instead because that’s all they could find.

The key to the drop in the broader unemployment rate was due to a 447,000 drop in the number of people employed part time but who would prefer full-time work, that comes on top of big drops in that category over the past year. That number could decline for negative reasons, such as workers completely dropping out of the labor force, but it also could be a positive reflection of people having their hours increased or part-time workers moving on to full time work.