A Low Unemployment Rate Isn’t Always a Good Thing

In the middle of a recession, one of the most closely-watched barometers of economic health is the unemployment rate.

But the unemployment rate, particularly at the regional level, can sometimes be misleading. Surprisingly, a low rate of unemployment isn’t always a sign of economic health, and the change in the unemployment rate isn’t necessarily a good measure of how well a region’s economy is doing.

The Pittsburgh Region’s unemployment rate in December was 6.0%. That’s significantly higher than the 4.4% rate a year earlier, and reflects the fact that we have over 20,000 more people unemployed than a year ago.

Although it’s little comfort to the large and growing number of unemployed workers in the region, our 6.0% unemployment rate was lower than the U.S. (7.1%) and lower than Pennsylvania as whole (6.4%); in fact, it was the 11th lowest rate among the largest 40 regions, and we had the 8th smallest increase over the past year.

But are all of the 10 regions with lower unemployment rates really doing better than we are? Milwaukee’s unemployment rate in December was only 5.8%, and its unemployment rate went up by only 1.1% over the previous twelve months, much less than the 1.6% increase in Pittsburgh. Yet from December 2007 to December 2008, the number of people working in Milwaukee decreased by over 2%. That’s faster than the decline in U.S. employment, and it was the 16th biggest decline among the top 40 regions. In contrast, employment in Pittsburgh actually increased slightly (by 0.3%) over that same time period.

How can Milwaukee have lost employment faster than Pittsburgh and the nation as a whole, but still have a lower unemployment rate and a smaller increase in the unemployment rate than either Pittsburgh or the U.S.?

The reason is Milwaukee’s labor force decreased, whereas the labor force grew in Pittsburgh. Milwaukee had over 7,000 fewer total workers (both employed and unemployed) in December than a year earlier, whereas Pittsburgh had 24,000 more workers than it did a year earlier. A decrease in a region’s unemployment rate doesn’t always mean that its residents found work – unemployment in a region can also decrease (or increase more slowly) if people get discouraged and stop looking for work or if they leave the region entirely, and that’s what appears to be happening not only in Milwaukee, but in Detroit, Cleveland, Minneapolis, and a number of other regions.

Although there’s no way to know for sure, it’s entirely possible that some people who lost their jobs in places like Milwaukee, Cleveland, and Detroit moved to Pittsburgh to look for work, since we had job growth here through most of 2008, whereas those other regions lost jobs in every month of the year. Someone can be unemployed in Pittsburgh without necessarily having lost their job here.

Similarly, some regions with bigger increases in unemployment can actually be doing better than we are. For example, Virginia Beach had a bigger increase in the unemployment rate over the past year than did the Pittsburgh Region (1.8% vs. 1.6%), but Virginia Beach also had the highest growth in employment of any large region in the country, thanks to a lot of military and government jobs. The labor force there grew faster than employment – probably due to job-seekers coming from other parts of the country – and that’s why unemployment went up.

So when Pittsburgh’s new unemployment rate comes out in mid-March, don’t assume an increase is all bad news – some of it may be new workers coming here. The only way to know for sure is to look at changes in jobs and the labor force, too, which you can find at the PittsburghToday website.

(A version of this post appeared as the Regional Insights column in the Sunday, March 1 Pittsburgh Post-Gazette.)