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What’s Up with the Unemployment Rate?

The unemployment rate jumped back to 9 percent in April, after declining a full 1 percentage point between November 2010 and March. Both the decline and the increase came as a surprise to many. Though signs of a recovery had appeared in the aggregate economy as early as the second quarter of 2009, the unemployment rate had stayed persistently high, above 9 percent, for more than 20 months. Then over the course of four months, the rate unexpectedly fell 1 percentage point, reflecting both an increase in household employment and a reduction in labor force participation. Most recently, the rate jumped up by 0.2 percentage point in April. Hence, over the past five months employment (as measured in the Bureau of Labor Statistics household survey) has increased by close to 800,000, while the number of unemployed workers has declined by about 1.3 million.

Figure 1. Unemployment Rate Decomposition

In some ways, these ups and downs should not be surprising even this far into the recovery. We would expect unemployment to go down as the economy recovers and firms start to create jobs. On the other hand, the number of unemployed workers looking for a job might also grow, if previously discouraged workers or those not looking for work start coming back to the labor force as the prospect of finding a job improves. These two channels can play against each other in determining the unemployment rate, and they certainly have in this recovery. Which channel will dominate over the next few months is an open question.

One interesting feature of the current recovery is that we are observing for the first time that greater numbers of unemployed workers are transitioning out of the labor force rather than to employment. Some economists believe that expiring Emergency Unemployment Compensation (EUC) could be contributing to the higher number of transitions out of the labor force. If EUC is responsible for some part of the increase, the number of individuals transitioning out of the labor force from unemployment should increase as the number receiving extended benefits decreases (for example, as benefits expire). The underlying assumption is that some individuals have been remaining in the labor force, despite being only marginally attached to it, in order to collect unemployment benefits. This sequence of events would have a tendency to lower the unemployment rate as well as measures of labor force participation going forward.

However, the transition of long-term unemployed workers out of the labor force did not account for the totality of the decline in the unemployment rate that we've seen in the past five months. There is no direct way of measuring this per se, but we can see it is pretty likely to be the case by looking at the relationship between the number of those unemployed 27 weeks or more and the number of those receiving EUC. Since the number of long-term unemployed workers peaked in May 2010, it has decreased by about 870,000. Over the same period, the number of people receiving extended benefits has decreased by slightly more than 1 million. Thus, some workers whose benefits are expiring are moving out of the labor force and some are staying in.

Figure 4. Long-Term Unemployed and Emergency Unemployment Compensation

Still, we should not assume that all of those leaving the labor force after their benefits expire would have left sooner had it not been for EUC. We can get a little insight into this question by comparing the types of people who left the labor force before and after there was EUC. If EUC is playing a big role, we'd expect the pool of people who are now outside the labor force to consist of the types of people who are typically marginally attached to the workforce—mothers, retirees, etc.

But the characteristics of workers who were not in the labor force in 2007 are not drastically different from those who were not in the labor force in 2010. The age distribution has changed only slightly; young workers (age 20 to 24) represent a slightly larger share now (7.4 percent in 2010 compared to 6.8 percent in 2007), workers aged 35 to 54 have decreased their share (from 18.3 percent in 2007 to 17.7 percent in 2010), and the share of workers aged 55 and older is virtually unchanged (53.5 percent in 2007 to 53.0 percent in 2010). This small shift in shares partly reflects the pursuit of more education by young workers, which is typical when prospects of finding a job decline.

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