It is one of the reasons the official BLS unemployment rate is actually understating the actual unemployment rate.
A quick primer on how this works: The Unemployment rate is depicted as a percentage, and like all percentages, it is actually a fraction. You take the total number of people in the labor pool, the total number of workers:
_________________ = Percent Employed
Total Labor Pool
Subtract the percent employed from 100% and you get the unemployment rate.
Most of us think about the unemployment rate going down due to more people getting jobs. But there’s also another way the official unemployment rate can go down. It happens when the denominator — the bottom number of the fraction — goes down.
And that is what has been occurring again recently. The Labor Pool has shrunk, making the unemployment rate look better than it actually is.
One of the confirming signs of this is the Temporary help. It declined in May (by almost 9K), indeed, it has been declining for the past six months. These are the first employes to be laid off, and it disputes the so-called tightness or lack of slack int he labor market.
Consider the following from Liscio Report, Philippa Dunne and Doug Henwood via Barron’s Alan Abelson:
"Moreover, the so-called household report, which
bulls used to gush over until the numbers went south, registered a job
gain of only 66,000, after a drop of 70,000 in April. And it also,
comment Philippa and Doug, "showed signs of slack developing in the
There were other indications that far from being
tight, as the bulls on the economy contend, the labor market is
manifesting some troubling trends. Folks not officially in the labor
force but who’d love a job increased by 155,000 to the "highest level
since early 2006." That suggests the real unemployment rate is over 5%.
And thousands more toilers are working part-time because they can’t
latch on to full-time jobs."
Like so many other government stats, we remain quite skeptical that the 4.5% unemployment rate corresponds to reality.
UP AND DOWN WALL STREET
Barron’s Monday, June 4, 2007