A Lower Unemployment Rate Doesn't Mean More People Are Working

News stories on Tuesday reported that the Pittsgburgh Region's unemployment rate fell to 3.6% in March, the lowest level in more than 37 years, a percentage point lower than the state unemployment rate, and 8/10% below the national rate.

Good news, right?

Unfortunately, no. Nobody seems to understand that a reduction in the unemployment rate is not the same as an increase in the employment rate.

The unemployment rate is based on a survey of households asking them (1) if they are working and (2) if they are not working, whether they are looking for work. The unemployment rate is the ratio of the number of people who say they are looking for work divided by the total number of people who are either working or looking for work:

Unemployment rate = People looking for work/(People working + People looking for work)

So the unemployment rate goes down if people looking for work get jobs, i.e., if the numerator decreases and the denominator stays the same.

But the unemployment rate can also go down if people who don't have jobs stop looking for work (either because they are discouraged, or because they enroll in school, or because they leave the region altogether), or if people lose their jobs and don't look for work, i.e., both the numerator and denominator change.

So what has happened in Pittsburgh?

Using the seasonally adjusted numbers, the unemployment rate dropped from 4.7% in February to 4.3% in March, an 0.4% reduction. The number of people unemployed in March 2007 was 43,000, compared to 46,600 in February 2007, a reduction of 3,600.

But the number of people EMployed also decreased, and by an even larger amount -- from 1,151,100 in February to 1,146,300 in March, a reduction of 4,800.

In other words, the unemployed people didn't get jobs (otherwise employment would have increased), but neither did the previously employed people become unemployed (otherwise unemployment would have gone up.

What happened was that the number of people in the labor force (people who said they were employed or looking for work) decreased by 8,300, i.e., by the same amount as the reduction in both unemployment and employment.

So unemployment is lower because people left the workforce, not because people got jobs.

The same is true over the past year. Unemployment in March 2007 was 13,200 lower than March 2006. Employment in March 2007 was also lower than a year earlier, by 1,600. And the labor force was lower by the total of the two -- 14,700 fewer people.

So when the unemployment rate went down from 4.7% in March 2006 to 3.6% in March 2007, it was because 14,700 people left the workforce.

When the labor force goes down by more than employment, the unemployment rate goes down. That's bad news, not good news.

In contrast, the U.S. unemployment rate went down from 4.9% in February to 4.5% in March. While that 0.4% reduction was the same amount as in Pittsburgh, the U.S. saw employment go up (by 844,000) and also saw the labor force increase (by 357,000). When employment goes up by more than the labor force does, the unemployment rate goes down. But in that case, it's good news.

So is the Pittsburgh economy getting better or worse? The region's economy has finally started adding jobs after a long slump. But the rate of job creation is well below the U.S. and most other regions. And we still have 16,000 fewer jobs in the region than 6 years ago. So it's not surprising if people are giving up and leaving the workforce. But it means we need to get serious about getting the regional economy growing.