Jobs Increase, but So Does Unemployment Rate: Why?

The April 2010 employment report from the Bureau of Labor Statistics highlighted a paradox that often crops up in the early stages of a recovery. Payroll jobs rose by 290,000 in the month, the strongest growth in four years. The household job survey, which includes farm jobs and the self-employed, showed an even bigger gain of 550,000 jobs. Yet the unemployment rate rose from 9.7 to 9.9 percent, reversing its earlier decline. How can this be?

The answer lies in the way the unemployment rate is calculated, as the percentage of members of the labor force who are unemployed. With a few exceptions, to be counted in the labor force, a person must be either working or actively looking for work. That means "discouraged workers," who would like to work but don't look for a job because they think there is nothing out there, are not counted in the unemployment rate.

In the early stages of a recovery, there is often a period when an improving job market draws many previously discouraged workers back into the labor force. Some of these new job seekers, but not all, actually find work, so both the numerator and denominator of the unemployment rate increase. If the denominator (the labor force) increases proportionately more than the numerator (the number of unemployed), then the unemployment rate rises. That is exactly what happened in April, when 805,000 people entered the labor force but only 550,000 of them found jobs.

At times like the present, a less-noticed statistic, the employment-population ratio, can provide a more reliable indicator of the health of the job market. The Employment population ratio hit a low for the cycle in December 2009 and has risen each month since then, although it still lies well below its cyclical peak.

Follow this link to download a free set of PowerPoint slides interpreting the latest jobs reports. If you like the slides, please post a comment to let other readers know how you use them in your class.