False Positive, Unemployment Falls to 19-Month Low
Life + Money

False Positive, Unemployment Falls to 19-Month Low

At first glance, the drop in the unemployment rate from 9.8 percent to a 19-month low of 9.4 percent in December is encouraging. But additional economic indicators suggest the numbers, announced on Friday by the Bureau of Labor Statistics, are neither sustainable nor particularly good news for the economy.

“Even though the unemployment rate fell sharply in December, it is still unacceptably high and we need robust employment growth in order to recover from the deep job losses that began over two years ago,” said Austan Goolsbee, chairman of the Council of Economic Advisers, largely echoing what he said about the unemployment situation last month. “The overall trajectory of the economy has improved dramatically since then, but there will surely continue to be bumps in the road ahead.”

Fewer Unemployed, Because Fewer Looking
On top of the unemployment rate remaining twice as high as before the recession hit, employers added only 103,000 jobs in December — significantly fewer than the 150,000 that economists had predicted, according to the BLS. However, BLS revisions from previous months showed payroll growth was higher in October and November, by a combined total of 70,000 jobs, which lessened the blow. Employers have added an average of 94,000 jobs per month in 2010, or an increase of 1.1 million for the year, according to BLS data — far below what is needed to keep pace with the growing population and to help absorb unemployed workers, said Sophia Koropeckyj, an economist with Moody’s.

While economists say an average of 150,000 jobs a month is needed to keep the unemployment rate from rising, December’s anomaly was attributed largely to a huge drop in the labor force, according to The Economic Policy Institute. In a press release, the D.C.-based think tank wrote that, at least half of the decline can be attributed to 260,000 people dropping out of the labor force. Labor force participation — which measures the percent of the population that is in the labor force — is 64.3 percent, a new low for the recession. The labor force includes anyone who is employed or unemployed, age 16 or over. Normal participation rate is around 66 to 67 percent and has gradually declined since 2000. The last time the labor participation rate was this low was in 1984.

Growth of 200,000 to 300,000 jobs a month or more is typical in strong economic recoveries, said Chad Stone, economist with the Center on Budget and Policy Priorities, think tank in Washington.

“The reported fall in the labor force may be due to the long-term unemployed being more willing to admit they are not actively looking for work after their extended benefits expired last month,” said Paul Dales, an economist with Capital Economics. “The unemployment rate may therefore simply rebound in January, particularly after Congress agreed to reinstate those extended benefits.”

The Politics of Unemployment
In light of today’s economic news, Richard Trumpka, president of the AFL-CIO, which represents over 12 million members, turned his attention toward partisan politics, namely the Republican push to cut spending.

“The cuts being proposed by Republicans in Washington and around the country including undermining Social Security and Medicare and cutting transportation spending are the wrong remedies at the wrong time and threaten our economic future,” he said.

Republicans had their own spin on today’s numbers, saying their “cut-and-grow” agenda will further improve the economy.

“It isn’t new faces Americans are looking for — it’s new policies that will cut spending and grow our economy,” said House Speaker John Boehner, R-Ohio, in a statement. “These are the priorities of the new House majority. We have already implemented reforms to make it easier to cut spending, and cut our own budget to demonstrate our commitment to making real cuts and tough choices.”

The number of unemployed fell by 556,000 to 14.5 million in December. The largest employment gain was in the leisure and hospitality sector (47,000 jobs), followed by the health care sector (36,000 jobs).

The number of discouraged workers, those outside the labor force not looking for work, grew year-over-year by 389,000, to 1.3 million in December (not seasonally adjusted).

Additionally, long-term unemployment remains a dark cloud over the economic recovery. The number of long-term unemployed, those jobless for 27 weeks or more, remained relatively stagnant at 6.4 million, accounting for 44.3 percent of the unemployed. The high jobless rate is so severe that it suggests older age groups could become “lost generations,” with declines in job security and income in a labor market with too many surplus workers.

“Today’s jobs report gives us no reason to take our foot off the gas in terms of creating new jobs and finding ways to support jobless Americans, particularly the long-term unemployed,” said Christine Owens, executive director of the National Employment Law Project.

Koropeckyj of Moody’s believes that despite the lackluster fourth quarter, payroll employment is expected to strengthen in 2011, helped in part by provisions of the Obama-GOP tax deal. She also predicts monthly employment gains will rise to 260,000 over the rest of the year.