The government reported Friday morning that the unemployment rate declined one-tenth of a percentage point to 9.4 percent after the economy shed 247,000 jobs in July. But if that many people lost their jobs, how could the unemployment rate go down instead of up?
The answer is that size of the labor force shrank by over 400,000 people. In June, the Labor Department estimated there were 154.9 million workers in the civilian labor force. In July, that number shrank to 154.5 million.
When the labor force shrinks even more rapidly than the job market, the unemployment rate goes down.
So why did the labor force shrink so fast? Well, maybe it didn't. "These numbers are somewhat erratic," said Dean Baker, co-director of the Center for Economic and Policy research, in an interview with the Huffington Post. The Labor Department makes its estimate based on a survey of 60,000 households.
Baker said that if the labor force consistently shrinks in a big way over the course of several months, that's something to be worried about. But so far it hasn't; the average size of the labor force actually increased from the first to the second quarter this year.
If the labor force contraction does turn into a trend, Heidi Shierholz of the Economic Policy Institute said it could indicate that people were giving up on looking for jobs entirely. And she pointed out that the government's data on labor market flows shows a substantial increase in the number of unemployed people who abandoned the labor force last month.
"That entirely explains the decline," Shierholz told the Huffington Post. "When you see a decline in the labor force in a market as crappy as this one, the bulk of what's happened is people are looking around saying, 'I've knocked on every door ten times. I'm just not looking anymore until things get better.'"
All of which means that there is nothing really to celebrate in the unemployment rate going down. The cold reality is that another quarter million jobs were lost.
And yet, that isn't entirely bad news. The 247,000-job-drop represents the smallest monthly loss in a year, meaning employers are beginning to ease up on layoffs.