Today’s US employment report once again showed headline growth in jobs in the US economy (with a +54,000 reading) but at the same time the unemployment rate ticked up from 9.0% to 9.1% (having also risen from 8.8% to 9.0% last month when 232,000 jobs were created).  How can it be that jobs are being created but more people are becoming unemployed at the same time?  This is not the bad news that it appears to be at first glance.

This counter-intuitive state of events is caused by the way the two numbers are calculated by the US Bureau of Labor Statistics (www.bls.gov).  The +54,000 headline number is the result of sampling 160,000 businesses & government agencies to find out how many people they hired or fired in the last month whilst the unemployment rate is calculated by telephoning people at random (out of a sample of 60,000 households) and asking them about their employment status.  If an individual says they are out of work and are looking for work then they go into the pool of unemployed people (13.914 mln in last month’s survey).  The BLS then divides this pool by the total labor force (153.693 mln last month) to arrive at an unemployment rate of 9.05% which is then rounded up to the 9.1% figure which is published.

However if an individual says they are out of work but have not looked for a job in the past 4 weeks then they are NOT counted as unemployed by the BLS.  There is no trickery about this, it is just the way the BLS calculates their statistics and they make no secret of the way they arrive at their numbers.  What we have seen recently is the US economy steadily creating jobs during 2011.  This is giving fresh hope to people who are out of work but had given up trying to find a job.  These “discouraged workers” are now telling the telephone canvassers that they are once again looking for work and this effect caused the pool to swell by 167,000 last month (as the number of discouraged workers fell from 989,000 to 822,000).  The BLS then divided this “pool” number by a labor force which grew by 272,000 last month and thereby calculated a higher unemployment rate.

What will eventually happen if the US economy continues to create jobs is that all the discouraged workers will start looking for a job and thereby join the pool.  Continual job creation will steadily chip away at the pool of unemployed workers and eventually start to  reduce the size of the pool (not forgetting that population growth adds an average of 125,000 workers to the labor force each month).  Only then will we see the US unemployment rate resume its fall (which recently took it down from 10.1% in Oct 2009 to 8.8% in March 2011 before backing up in the last two months). Once it falls by a couple of percentage points the Fed will judge the economy to be strong enough to withstand a rise in interest rates.  The Fed Funds rate will then be ratcheted steadily higher in 25bp increments and the “bottomless punchbowl” will have been removed.