When determining the unemployment rate the denominator of the calculation is: total labor force. Some media reports of the current/recent decline in unemployment rates as measured by U3 [headline unemployment rate] have pointed out that 5.4 million discouraged workers, relating to some degree to the historically low labor participation rate, has caused the denominator of “total labor force” to shrink hence causing unemployment rates to fall which is causing an unemployment rate which becomes a false measurement.
Stated alternatively, U3 headline unemployment is registering a declining unemployment rate that causes a false picture of the true unemployment picture as one needs to strongly consider the calculation of unemployment, specifically the army of discouraged workers [5.4 million] and the historically low labor participation rate. That during times of robust GDP growth unemployment should actually rise before it falls as the discouraged workers are attracted back to the labor force due to improving economic conditions which means the denominator of the calculation is flooded with new participants causing unemployment to rise is the short and medium term. Hence the current U3 unemployment rate measurement is argued as merely improving, in part, due to people leaving the work force [the rise of the discouraged worker]. Therefore, an improving headline unemployment rate is matched by a rise in the discouraged worker population meaning the unemployment rate yielded by the U3 calculation tells a false story.
Enter the state of Michigan! The denominator discussion above regarding the unemployment calculation goes to a new zenith in Michigan. What if a particular state’s unemployment rate, the calculation thereof , in particular the denominator “total labor force”, yields an improving unemployment rate due to entire households leaving the state at a rate on one every twelve minutes? Yes, a rate of 43,200 households per year leaving the state of Michigan! (1) (2) (3)
Hence the “total labor force” in Michigan is shrinking an incredible rate leading to a shrinking total labor force denominator in the unemployment rate calculation resulting, in part, to an improved unemployment rate. That is to say, the Michigan example goes beyond discouraged workers to the phenomena of “see-you-later-bye” workers.
(1) Leaving Michigan Behind: Eight-year population exodus staggers state, The Detroit News, 04/02/2009
(2) Muskegon County schools lose 800 students as families move out, Mlive, 09/30/2010
(3) Michigan Unemployment Rate Below 10 Percent, Lowest Since 2008, Yahoo News, 12/17/2011