Here’s What the Headline Unemployment Rate Is Hiding

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The headline unemployment rate, intended to provide a snapshot of the health of the labor market, has become increasingly misleading over the past few months. Weak payroll growth and a rapid reduction in the labor force participation rate has superficially deflated the headline measure, which fell 0.1 percentage point to 6.6 percent in January, according to the U.S. Bureau of Labor Statistics. This is lowest level of unemployment since October 2008, but at 63 percent, the labor force participation rate is down substantially from its pre-crisis average of about 66 percent. Moreover, payrolls grew by just 113,000 in January and by 75,000 in December.

The data suggest that the decline in headline unemployment has been caused by labor force attrition, not by payroll growth. A flat and relatively low hires rate supports this theory. The preliminary hires rate was 3.2 percent in December, down from 3.3 percent in November and below a pre-crisis average closer to 3.9 percent.

It’s hard to pinpoint exactly what is causing this weakness in the labor market — the most accurate diagnosis is likely a mix of forces — but there is some evidence that one of the contributing factors is structural. According to the BLS, the job openings rate has increased fairly consistently throughout the recovery, suggesting that businesses are looking for new employees. In December, the preliminary job openings rate was 2.8 percent, down slightly from 2.9 percent in November but still near post-crisis highs. At a seasonally adjusted 4 million in December, the total number of job openings in the U.S. was just off its post-crisis high, hit in November.

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