Jobs Growth May Not Reduce the Unemployment Rate

The stock market eagerly awaits tomorrow's unemployment numbers. Economists, on average, predict that job losses will have stopped, but that jobs growth hasn't resumed. The unemployment rate, last reported at 10%, is expected hover around that level, with perhaps a minor increase.

This data, whatever it turns out to be, will probably tell us less than the stock market seems to think it means. Employment levels must be viewed in a dynamic context. The labor force keeps growing, whether or not there is a recession. Kids reach adulthood, and immigration continues (although it's now at a much lower level because of the recession). To deal with population growth, we need 100,000 new jobs a month or more simply to keep the unemployment rate level. It's been close to 2 years since the number of jobs in the U.S. has increased. Even if it turns out that job growth has resumed, the unemployment level could increase if the number of new jobs isn't enough to accommodate the entry of new workers into the labor force.

Aside from population growth, another confounding factor is the return to the labor force of discouraged workers. The Bureau of Labor Statistics includes unemployed persons in the labor force only if they have actively sought work during the last 4 weeks. Those who want jobs but are too discouraged to look for them aren't counted in the labor force. In other words, increased despair lowers the unemployment rate. Conversely, as the economy swings back toward recovery, discouraged workers may become hopeful again and start actively searching for jobs. Those that do so are deemed to have re-entered the labor force, and their re-entry can worsen the unemployment rate by increasing the numbers of unemployed persons actively seeking work.

The stock market is always looking for short cuts, simple ways of telling if things are getting better or worse. But economies and financial systems are complex and sometimes opaque. Life is difficult. Monthly unemployment figures are sometimes revised in subsequent months. You need to look at a lot of data and information to figure out where the economy is and where it is going. Don't read too much into tomorrow's unemployment numbers. Invest for the long term.