Will Unemployment Misbehave Before the Election?

Unemployment is critical to the outcome of the presidential election, and there are only seven more unemployment rates until election day; the last one for October to be reported on November 2.

If employment growth turns out to be sluggish between now and the election, rising by just enough to absorb additions to the labor force due to population growth, the unemployment rate would be expected to stop falling. If employment does better, then unemployment would presumably continue to decline.

Demographics don't affect unemployment very much in the short run. But there's another potentially troublesome variable - the unemployed in the months ahead who will be exhausting their federal and state unemployment benefits. While they were collecting benefits the insured had to be looking for work and so were officially counted as unemployed. But when their benefits run out, what will happen then? Some states are already seeing unemployment benefit exhaustions rise as the result of recently tightened federal eligibility rules and cuts in the duration of benefits.

If there's only modest job growth in the coming months, many of the jobless whose benefits run out are likely to be too discouraged to continue looking for work or unable to afford the cost of continued job search. They and other frustrated jobseekers not covered by unemployment insurance can be expected to drop out of the labor force, causing the official unemployment rate to decline.

On the other hand, if employment does better with increases of around 250,000 a month, unemployment would be expected to continue to drift downward. But this time it may not, at least not in the short run.

Given the sizeable buildup of dropouts already waiting on the sidelines, boosted by many of those who are about to use up their jobless benefits, there could be a competitive rush into the job market in response to a pickup in employment. In the months leading up to the election the increased job search could very well push up the jobless rate before unemployment subsequently adjusts back to a more normal relationship to employment.

So we could be going into an election where unemployment is either falling in a weak labor market or rising in an improved labor market - both temporary, ill-timed, and perverse phenomena.

In the case where unemployment before the election is falling because of labor force withdrawal, you can bet the White House will treat the data as good news. And in the event that unemployment rises because of an influx of jobseekers into the labor force, you can be sure the Republicans will make hay, blaming you know who.

The potentially distorting effects on unemployment will come from the supply side of the labor market, not the demand side. To get a more accurate reading of what's happening, it may be wiser as the election nears to pay more attention to employment rather than unemployment.

If employment picks up in the months ahead and is accompanied for a time by a higher unemployment rate, Mr. Romney will have to decide what to emphasize - whether to praise the free market for bringing about an improvement in jobs or blame President Obama for failing to contain unemployment. It could be risky to do both. A Republican economist would advise Mr. Romney to highlight the free market. A political adviser might feel negatives sell better and tell him to go for the blame.

If weakness in the job market persists and unemployment stops falling, and if there's increased labor force withdrawal, then it's White House blame on all counts.