Unemployment Rate, Payroll Jobs

Each day the Research staff takes a look at recently released economic indicators, addressing what these indicators mean for REALTORS® and their clients. Today’s update discusses the unemployment rate and payroll jobs.

• Great news. The unemployment rate dropped a notable 0.4 percent to 8.6 percent - the lowest level since February 2009 - after being stuck for 7 months between 9.0 and 9.2 percent.
• At the same time, the economy added 120,000 payroll jobs, about in line with the average job creation of the past 12 months which has been 131,000 - good but not great news. How do we reconcile these two pictures of the job market and why the sudden drop in unemployment?
• First, the unemployment rate comes from a survey of households while the number of jobs added comes from a survey of employers and sometimes the two surveys tell us slightly different information.
• Households are surveyed to determine the unemployment rate because only certain types of people without jobs are considered unemployed. Those who choose not to work for family or other reasons such as school are not counted as unemployed.
• In November, 315,000 people left the labor force. In contrast, from August to October nearly a million had joined the labor force (mostly as workers though some were unemployed - persons looking for work). That explains some of the news behind today’s falling unemployment rate (which drops when people leave the labor force).
• At the same time, nearly as many - 278,000 people - indicated that they are now working on the household survey. In fact, more than 300,000 new employed persons per month have been found on the household survey since August, compared with the 133,000 per month average increase in payrolls.
• Some of the difference between the two data sources is explained by the fact that the household survey counts farm workers and the self-employed who are not picked up on payroll surveys, but even after adjusting for these variables, the gap persists.
• One explanation may be in the way BLS computes data. New firms are not immediately part of the survey, thus the BLS makes an estimate for employment at new firms as well as job loss at dying firms. These estimates are pretty accurate when the economy hums along at a steady pace, but changes in the way the economy is functioning may cause the errors in these estimates to be larger than usual.
• As the economy continues to add jobs, more individuals may come back into the labor force and the unemployment rate may rise again in the future. At the same time, continued job growth is decent as reported by the BLS and may in fact be a bit better than is reported. In summary, the economy is moving in the right direction and may be moving in that direction a bit more steadily than the payroll data indicate.