Monday, June 06, 2016

Why Did the Unemployment Rate fall Sharply with Few Jobs Added?

by Bill McBride on 6/06/2016 03:05:00 PM

An interesting question is why the unemployment rate fell so sharply in May, even with relatively few payroll jobs added (38,000 jobs added in May).

First, it is important to remember that there are two separate surveys for the Employment Situation Summary. The headline payroll jobs number comes from Current Employment Statistics (CES: payroll survey), a sample of "approximately 145,000 businesses and government agencies representing approximately 623,000 worksites".

The unemployment rate and the participation rate comes from the Current Population Survey (CPS: commonly called the household survey), a monthly survey of about 60,000 households.

Background: To understand how the surveys are conducted, here is an explanation from the BLS about the household survey, and an explanation about the establishment survey.

Here a few definitions from the BLS Glossary:

Civilian noninstitutional population: Included are persons 16 years of age and older residing in the 50 States and the District of Columbia who are not inmates of institutions (for example, penal and mental facilities, homes for the aged), and who are not on active duty in the Armed Forces.

Labor force: The labor force includes all persons classified as employed or unemployed in accordance with the definitions contained in this glossary.

Labor force participation rate: The labor force as a percent of the civilian noninstitutional population.

Unemployment rate: The unemployment rate represents the number unemployed as a percent of the labor force.

So a lower participation rate - with the same level of employment - would mean a lower unemployment rate.

The following table is based on the Household survey (all seasonally adjusted):

Household Survey (000s)
  AprilMayChange
Civilian noninstitutional
population (16 and over)
252,969253,174205
Civilian labor force158,924158,466-458
Employed151,004151,03026
Unemployed7,9207,436-484
Participation Rate62.82%62.59%-0.23%
Unemployment Rate4.98%4.69%-0.29%

So the estimated number of people in the labor force declined by 458,000 in May, and the number of unemployed dropped by 484,000. A small portion of this decline was due to higher employment, but most of the decline in the unemployed was due to the decline in participation (even while the population increased).

Does this mean 458,000 people dropped out of the labor force in May?  Probably not.   There is a lot of month-to-month volatility in the household survey (the establishment survey is much better for jobs). The following table shows a comparison to May 2015 (year-over-year change).

Household Survey (000s)
  May
2015
May
2016
Change
Civilian noninstitutional
population (16 and over)
250,455253,1742,719
Civilian labor force157,367158,4661,099
Employed148,748151,0302,282
Unemployed8,6197,436-1,183
Participation Rate62.83%62.59%-0.24%
Unemployment Rate5.48%4.69%-0.78%

This makes more sense. About one third of the decline in the unemployment rate over the last year is due to the declining participation rate, and about two-thirds is due to more employment.  As I've noted before, the participation rate is expected to decline due to demographics and long term trends.

My sense is that some of the increase in the participation rate over the last few months was due to survey volatility, and that was reversed in May.  The real disappointment in the May report is the few jobs added in the establishment report over the last three months.