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Saturday, August 28, 2010

Employment Report Preview: Will the unemployment rate spike higher?

by Calculated Risk on 8/28/2010 01:05:00 PM

The August employment report will be released next Friday, Sept 3rd. The consensus is for the loss of around 90,000 payroll jobs, and an increase in the unemployment rate to 9.6% (from 9.5% in July).

The decennial Census will subtract about 116,000 payroll jobs in August (estimate here), so the consensus is for about +26,000 payroll jobs ex-Census.

I will take the under on the number of payroll jobs. I think it is possible that we will see a negative payroll number, ex-Census, because of weak private hiring combined with state and local layoffs.

And I will also take the over on the unemployment rate. Here is why:

The unemployment rate is from the household survey, and is impacted by the participation rate - the percent of the civilian population in the labor force. The following graph shows the sharp decline in the participation rate during the current employment recession.

Participation Rate Click on graph for larger image in new window.

Note: y-axis starts at 64% to show the change.

The increase in the participation rate earlier this year was good news. This meant some workers who had given up were rejoining the labor force. The increase in the participation rate pushed up the unemployment rate, since the economy wasn't adding jobs fast enough to employ all the workers rejoining the labor force. But it was still good news that the participation rate was increasing.

However it was bad news when the participation rate started falling again over the last few months. The decline in the unemployment rate - from 9.9% in April to 9.5% in June and July - was related to the decline in the participation rate. And workers leaving the labor force is not great news.

But what will happen to the participation rate in August? The first guess, with the weak economy, is that the participation rate declined further in August, putting downward pressure on the unemployment rate.

But there are two reasons I think the participation rate might have increased.

Summer teen employment: As I noted in June, the record low number of teens joining the labor force appeared to push down the seasonally adjusted participation rate (and therefore pushed down the unemployment rate). I think this will start to unwind in August. As a lower than normal number of teens leave the labor force, the seasonally adjusted teen labor force will probably increase - my guess is by 100,000 to 150,000 workers. All else being equal, this would push up the participation rate, and also push up the unemployment rate to around 9.6%.

Unemployment Benefits: At the end of July, the qualification dates for the various tiers of Federal unemployment benefits were extended through November 30th. This extension was also made retroactive to June 2nd. Some people who have given up, might rejoin the labor force to collect additional benefits. If this happens, the participation rate might increase in August - and that would push up the unemployment rate. Although the number is uncertain, if 250,000 workers rejoin the labor force to collect benefits that would push the unemployment rate to 9.7%. If 500,000 workers rejoin the labor force, plus the 125,000 from the teen adjustment, the unemployment rate would increase to around 9.9%.

As noted above, the weak economy would normally lead to a lower participation rate, but these two reasons might push the participation rate up - and that could mean a higher than expected increase in the unemployment rate.