Why Did the Unemployment Rate Drop?

By Phil Izzo

The U.S. unemployment rate tumbled to 7.8% in September but a broader measure was flat at 14.7%.
The decline in the main unemployment rate was driven by positive factors. In previous months, the rate has fallen because more Americans were no longer looking for work. That wasn’t the case in September. The labor force increased, as more people were seeking jobs. Meanwhile, the number of unemployed tumbled by 456,000, while those with jobs surged 873,000.

That number may come as a shock, considering that the number of jobs in the economy rose just 114,000 last month. That’s because the number of jobs added to the economy and the unemployment rate come from separate reports. The number of jobs added comes from a survey of business, while the unemployment rate comes from a survey of U.S. households. The two reports often move in tandem, but can move in opposite directions from month to month.


One possible explanation: The Labor Department revised up its estimate of payroll growth in July and August, but the unemployment rate doesn’t get revised. So it’s possible the big one-month drop in the unemployment really reflects improvements over the past two or three months.
Though the headline of the household survey looks good, the fact that a broader rate of unemployment didn’t budge presents a puzzle. The unemployment rate is calculated based on the number of unemployed — people who are without jobs, who are available to work and who have actively sought work in the prior four weeks. The “actively looking for work” definition is fairly broad, including people who contacted an employer, employment agency, job center or friends; sent out resumes or filled out applications; or answered or placed ads, among other things. The unemployment rate is calculated by dividing the number of unemployed by the total number of people in the labor force.
The broader unemployment rate, known as the “U-6″ for its data classification by the Labor Department, includes everyone in the official rate plus “marginally attached workers” — those who are neither working nor looking for work, but say they want a job and have looked for work recently; and people who are employed part-time for economic reasons, meaning they want full-time work but took a part-time schedule instead because that’s all they could find.
In September, the number of part-time workers who would like full-time jobs surged by 582,000. That represents about two-thirds of the increase in employment last month and is larger than the drop in the number of unemployed. That’s why the U-6 stayed at 14.7% in September.
So, while more people are working according to the household survey, and that is an undisputed positive, the quality of those jobs remains in question.
Related: Phil Izzo and Sudeep Reddy have details on September’s jobs data on The News Hub.