Saturday, December 3, 2011

Unemployment Drops but is it Time to Celebrate?

The U.S. economy showed flickers of improvement in October and the encouraging trend continues with the latest unemployment figures released by the Labor department showing a further drop in unemployment. All in all, a net 120,000 news jobs were created last month. And the unemployment in November was 8.6%, down from 9% the previous month. True, the unemployment figure remains almost frustratingly high but it is now the lowest unemployment rate in more than two and a half years since March 2009.  

A casual reading of the latest unemployment figure might suggest a deceptively rosy picture of the economic well-being of the country. The unemployment figure on its own does not reveal that more people, a total of 315,000, left the workforce in November than the number of unemployed workers who found jobs last month. The labor participation rate, which is the ratio of people who are either employed or have been looking for a job in the past 4 weeks, plummeted to 64%. Thus the reduction in unemployment is not attributable so much to a substantial improvement in the economy leading to more jobs as to possibly a growing sense of frustration among the unemployed, inducing those who can afford to do so to cease looking for a job altogether.

The article, "U.S. shrinking workforce a worrisome sign,” directs our attention to other causes of concern. Apart from the increase in discouraged workers and consequent reduction in labor participation rate, the diffusion index for private sector jobs dropped as well to 54.7% in November from 59.6% in October, the greatest fall in a year. This means that not all sectors are experiencing job creation; although an overall reduction in the unemployment rate indicates that more jobs were created last month than the month before it, compared to October, fewer industries actually increased employment rather than slashing jobs. That is not heartening. And neither is the fact that the public sector saw a loss of 20,000 jobs. Moreover, only 2,000 new jobs was created in the manufacturing sector, a gain that is lower than expected. In the services sector though, retailers created 49,800 jobs in the run-up the holidays, propelled in part by of the increase fervor surrounding Black Friday. Whether these retail jobs remain after the holiday shopping season is over remains to be seen.

In a nut shell, although the drop in unemployment rate is a positive sign, it is not back to business as far as the economy is concerned. More than 13 million Americans are still without jobs. And the shrinking labor participation rate indicates that many of the long-term unemployed are becoming discouraged and bowing out of the race of job-search. The real unemployment is not necessarily going down significantly even as official unemployment is because not a great many people are finding a job but rather many are not looking for one and so are excluded from official employment statistics. That many are not now considered unemployed however does not mean they have a job.

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