And About that Labor Participation Rate and The Supposed Headline Unemployment Rate

"CNBC's Rick Santelli: You know what I said at 8:30 Eastern? We want a million jobs an hour. That's what we want. What we got looked like a good report. I said, 'Let's get the calculator out,' and I did. And so did a boatload of my sources and big blogs that many people read like Zero Hedge. The labor force participation rate, if you look at non-seasonally adjusted, a fresh low going back to April of '83. If you look at seasonally adjusted, a fresh low participation rate going back to December of '81. What does that mean in English? Shrinkage. Shrinkage. 1.2 million people are now not considered unemployed anymore. They just have left the system. So, we need to concentrate on the internals, and eventually we want to watch the fixed income market to see if some of this sets in as people do their ciphering." - Real Clear Politics, 02/03/2012

"A month ago, we joked when we said that for Obama to get the unemployment rate to negative by election time, all he has to do is to crush the labor force participation rate to about 55%. Looks like the good folks at the BLS heard us: it appears that the people not in the labor force exploded by an unprecedented record 1.2 million. No, that's not a typo: 1.2 million people dropped out of the labor force in one month! So as the labor force increased from 153.9 million to 154.4 million, the non institutional population increased by 242.3 million meaning, those not in the labor force surged from 86.7 million to 87.9 million. Which means that the civilian labor force tumbled to a fresh 30 year low of 63.7% as the BLS is seriously planning on eliminating nearly half of the available labor pool from the unemployment calculation. As for the quality of jobs, as withholding taxes roll over Year over year, it can only mean that the US is replacing high paying FIRE jobs with low paying construction and manufacturing. So much for the improvement." -ZeroHedge, 02/03/2012

The entire articles, Real Clear Politics and ZeroHedge, appear in the links below. Be sure to note the charts in the ZeroHedge article:

http://www.realclearpolitics.com/video/2012/02/03/santelli_12_million_fall_out_of_labor_force_as_participation_rate_hits_20-year_low.html

http://www.zerohedge.com/news/record-12-million-people-fall-out-labor-force-one-month-labor-force-participation-rate-tumbles-

Upon Further Review: The 01/06/2012 Jobs Report and the Rise of the Discouraged Worker

Has the employment/unemployment picture become brighter? Has the unemployment rate fallen? Are current unemployment rate statistics reliable measurements?

The problem [illusion] with the current unemployment rate statistic lies in the labor participation rate. That is, the labor participation rate is at a historical low of 64%. That is to say, in recent job reports more and more discouraged workers, workers giving up on job seeking and hence leaving the work force all together, has increased. Specifically, 120,000 more people left the work force in the last jobs report and 50,000 more left the work force in the current jobs report of 01/06/2012. Hence in the last two jobs reports 170,000 people have left the work force. (1) (2)


Why is the labor participation rate causing an illusion? Imagine all things being equal but reducing the size of the total labor force:

Formula for the unemployment rate is:

Unemployment Rate = Number of Unemployed / Total Labor Force * 100


Hence as the denominator shrinks, as people become discouraged and leave the work force, even if the number unemployed remains constant, the unemployment rate falls as the total labor force shrinks. Moreover, an absolute standing army of millions of discouraged workers exists and this standing army is receiving more recruits. That is, the rise of the discouraged worker. (3)

If the economy is growing at a robust pace, then the army of discouraged workers are encouraged to reenter the work force. That is, a robust economy attracts workers. Hence the unemployment rate should rise as the economy improves as the standing army of discouraged workers reenter the work force causing the denominator, in the formula above, to be flooded by new participants.


The robust economy, counterintuitively, would display a rising unemployment rate, for an extended period of time, until which time the newly repatriated workers [the standing army of discouraged workers] are absorbed into the employed.


UPDATE: CNBC, Is Strong Jobs Data Sending a 'Sell' Signal?

http://video.cnbc.com/gallery/?video=3000066189


UPDATE TWO: CNBC:  Santelli: Jobless Rate Not as Good As It Looks

http://video.cnbc.com/gallery/?video=3000066200

　

　
Notes:

(1) What is the Labor Force Participation Rate? About Economics.



http://economics.about.com/od/unemploymentrate/f/labor_force.htm

　

(2) Databases, Tables & Calculators by Subject, BLS, 01/06/2011

http://data.bls.gov/timeseries/LNS11000000?output_view=net_1mth



(3) 8.5% Unemployment: Why 2011's Best Jobs Report Still Isn't Good Enough, The Atlantic.


http://www.theatlantic.com/business/archive/2012/01/85-unemployment-why-2011s-best-jobs-report-still-isnt-good-enough/250980/