Our Incredible Shrinking Labor Force

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The Bureau of Labor released its most recent jobs report today and at first blush, the numbers are a bit confusing. In total, there were 125,000 jobs lost last month and just 83,000 new private sector jobs were added. Yet somehow the unemployment rate actually dropped from 9.7% to 9.5%, which is the lowest it’s been all year.

So how exactly does our unemployment rate improve this much when the workforce itself seems to be losing more jobs than it’s gaining? As many publications have pointed out already, the number of jobs lost in June was inflated because the government let go of many temporary workers hired by the U.S. Census. However, the larger reason is the incredible and mostly underreported shrinkage of the labor market.

First, it’s important to understand that each month, the Bureau of Labor actually releases two reports: one is a survey of the number of jobs that are gained or lost and another calculates the unemployment rate (the number of people not employed, though still actively looking for work).

“These two different surveys usually sync up over the long term, but over a one month period they are not going to always tell the exact same story,” said Sharon Cohany, an economist at the Bureau of Labor statistics. That said, Cohany admits that the improved unemployment rate may seem at odds with the meager jobs report. “These are not necessarily contradictory, although they are not necessarily consistent either.”

One key fact that Cohany highlights which may have gotten lost among all the other data is that the U.S. civilian labor force has declined “quite a bit.” And what she really means is that the size of our labor force has just shrunk by its largest amount all year. Overall, 652,000 Americans left the civilian labor force last month. By comparison, about 300,000 left the labor force in May and in the four months prior to that, there were actually increases in the number of people entering the labor force.

Ultimately, the unemployment rate is calculated by dividing the number of unemployed Americans by the total labor force, so this drop is largely responsible for the improved unemployment rate.

There are several possible reasons for why so many people have decided to leave the workforce. As Cohany points out, some of those same people who once held Census jobs may have decided to temporarily bow out of labor market and count their paychecks. Alternatively, there is always the fear that Americans are frustrated with the lack of jobs and giving up their search. But there may also be a less menacing explanation for this, although these seem mostly unsatisfying.

"These figures are seasonally adjusted so they take into account seasonal patterns that occur in the month, but that’s not to say that all the seasonal movements are accounted for,” Cohany said. She cites potential factors like teachers leaving school for the summer or parents coming in and out of the labor force during the summer months, although as she admits, the latter doesn’t happen so much anymore. And while this may not be true across the board, many teachers do continue to get paid during the summer, which would presumably mean they are still part of the labor force.

The larger question though is whether the U.S. labor market will continue to shrink in the second half of 2010 as it has done in the last two consecutive months. “I do think it takes more than a couple of months to establish a trend like this,” Cohany said. “Things do ebb and flow, and the labor force measures do sometimes move in fits and starts.” But as Cohany confesses about the numbers in the report, “it is a mixed picture.”

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