The Hidden Message In Friday's Unemployment Number
The weak showing in May nonfarm payroll jobs - up 69,000 - failed to pass the Bureau of Labor Statistics (BLS) test of statistical significance and so in technical parlance the change was not different from zero. The May 0.1 uptick in the unemployment rate to 8.2 percent also flunked the significance test as did the recorded rise in civilian employment from the government's household survey. Ditto for the change in payroll jobs in April, originally reported at a statistically significant plus 115,000 but subsequently revised to plus 77,000, falling below the significance threshold.
The monthly change in one key labor market indicator, however, did pass the significance test - the labor force participation rate. It rose 0.2 in May, from 63.6 to 63.8 as men, women, and teenagers entered the work force. Had the participation rate not risen last month, the unemployment rate would have fallen to 7.9 percent.
The participation rate usually rises in a strengthening job market and falls in a weakening market. In the past three months the job market notably worsened, with the average monthly rise in payrolls falling to 96,000. In the prior three months the average monthly gain amounted to 252,000. The poor showing in May indicates that the worsening trend was more than just a seasonal phenomenon.
Why did the participation rate rise instead of fall last month in the face of a weakening job market? Was it an aberration or can we expert more atypical labor force behavior in an atypical economy?
Some background. Though the behavior of the labor force participation rate is pro-cyclical on net, there are crosscurrents going on beneath the total. Economists call the dominant pro-cyclical component the discouraged worker effect. In a weak job market some of the unemployed give up job search out of frustration and leave the labor force. When job prospects improve, they resume looking for work.
The opposing counter-cyclical behavior among other members of the household is called the additional worker effect, which is often not directly observed in the participation rate data because it is usually weaker than the discouraged worker effect. When a household earner becomes unemployed, it's not uncommon for other members of the household to enter the labor force and look for employment in an effort to make up for the loss in income.
When the participation rate rises in a weak labor market, like last month, it could reflect the additional worker effect temporarily dominating the discouraged worker effect. The crippling length and depth of the Great Recession that continues to plague the labor market may be pushing additional household workers into the work force out of necessity.
Month after month more and more of the jobless are exhausting their extended unemployment insurance. When their benefits expire, this can necessitate additional household members having to take up the job search, thereby pushing up the unemployment rate. This may be why the labor force participation rate rose in May. With job growth weakening in the last few months, it doesn't make sense that the participation rate rose because more of the jobless outside the labor force were encouraged to resume looking for work.
To the contrary, the data are telling us that the additional worker effect strengthened. Besides the growing job shortage and the loss of unemployment benefits, household income remains depressed and household savings are being drawn down, putting pressure on more household members to seek employment.
Should the job market remain weak or weaken further, desperation could keep secondary household jobseekers active for months to come, causing the participation rate and the unemployment rate to rise into the election.
There are millions of people outside the labor force who want a job. Ironically, if the job market should improve in the months ahead, an influx into the labor force of the hopeful jobless waiting on the sidelines could also push up the unemployment rate.
There are only five more unemployment rates to be released before the November election. They'll be political hotcakes. Whether jobs pick up or remain weak in the months ahead, headline unemployment could rise either way. President Obama could find himself in a lose-lose situation.