U.S. unemployment rate drops to 7.8%! How did that happen?

by Rory Cripps | October 6, 2012 at 09:28 am

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There's much confusion, many questions, and even conspiratorial sentiment, regarding the September 2012 U.S. unemployment rate. And the confusion, questions, and conspiratorial sentiment are quite understandable.

When the U.S. media and other media outlets throughout the world report the U.S. unemployment rate, on the first Friday of every month, they only focus on and report that x amount of American nonfarm jobs (which include government jobs) were created or lost. But the U.S. Department of Labor Bureau of Labor Statistics, which calculates and sends out, for press-release, the official U.S. unemployment rate and which the media reports, includes farm workers, unpaid family workers, private domestic workers, and other relatively low-paid workers which fall outside the heading, of "nonfarm" workers.

Farm workers, unpaid family workers, private domestic workers, etc.--all of the American workers that fall outside the heading of "nonfarm" workers--have comprised, on average, 7 percent of the American labor force throughout the past three decades. And even though they're essentially ignored by the media when the media reports the increase or decrease in "nonfarm" jobs, they figure into and, often times dramatically, influence the U.S. unemployment rate.

In September, according to U.S. Department of Labor statistics, there were 759,000 new jobs created in the U.S. which fall under the heading of farm workers, unpaid family workers, private domestic workers, etc.--the bulk of which are in the farming and agricultural sector. In other words, the 759,000 jobs that were created in the month of September and which did not fall under the heading of the 114,000 nonfarm jobs, which the media focused on, are included in the U.S. Department of Labor's unemployment rate calculation. And that's the reason--and the only reason--why the unemployment rate dropped to 7.8 percent in September 2102. If it were not for those 759,000 jobs that don't fall under the heading of nonfarm, the unemployment rate for September would be 8.5 percent.

The official unemployment rate is calculated by dividing the number of unemployed by the civilian labor force. The civilian labor force in September was 155,063,000 (up 418,000 from August) and the unemployment count was 12,088,000 (down 456,000 from August). The huge increase in farm jobs makes sense, because in many areas of the U.S. the harvest season occurs circa the month of September or thereabout and, consequently, the 2 million (estimated) farm owners throughout the United States hire thousands of migrant farm workers to harvest their crops. Moreover, unpaid family workers, who are included in the U.S. Department of Labor's unemployment and employment calculations, typically engage in agricultural and farming work.

The question is, why is there so much confusion and so many questions, even among professional economists, in regard to September's drop in the unemployment rate? All the numbers are there in black and white in the U.S. Labor Department's A and B tables. One ongoing source of confusion arises from the U.S. Department of Labor's use of two monthly employment and unemployment surveys.

The above mentioned A tables, are comprised of data from the Current Population Survey (CPS), which is based on a monthly survey of about 60,000 households and includes all workers. The CPS is conducted by the U.S. Census Bureau for the U.S. Bureau of Labor Statistics (BLS). On the other hand, the B tables are comprised of data from the Current Employment Statistics Survey (CES) which is based on monthly data collected from the payroll records of about 141,000 businesses and government agencies and includes nonfarm employees only. When the media reports the monthly unemployment data, it typically refers to the CES data which only reports the nonfarm employment numbers. For a complete explanation of the difference between the CPS and CES see the U.S. Department of Labor's Employment Situation Technical Note.

According to the U.S. Department of Labor, there were 873,000 more jobs in September than in August. One-hundred-and-fourteen-thousand of those jobs fell under the nonfarm designation and included 10,000 government jobs and 44,500 health care and social assistance jobs. That doesn't mean that 873,000 workers found jobs. That simply means that the U.S. Department of Labor estimated that there were 873,000 separate and distinct jobs created in September.

Under the CES, for example, an individual worker could very well be working three part time jobs and therefore be represented in the CES as three additional workers. The CPS, on the other hand, which includes all workers, counts individuals only once even if they have more than one job. In other words, according to the U.S. Department of Labor, in the month of September, there were at least six-and-a-half times more workers who found jobs in farming, unpaid family work, and private household work than those who found jobs in the nonfarm sector.

Since 1980, there have been 21 occasions when the official U.S. unemployment rate dropped three-tenths-of-a-percent or more from the previous month's rate. Throughout that time there were 16 occasions when the unemployment rate dropped three-tenths-of-a-percent, four occasions when it dropped four-tenths-of-a-percent, and one occasion (July 1983) when the rate dropped seven-tenths-of-a-percent to 9.4 from June's 10.1 percent.

One counterintuitive example of how the U.S. Department of Labor's monthly unemployment rate calculation can be confusing occurred in October of 1992, when George H.W. Bush was President. At the time, the unemployment rate dropped to 7.3 percent from September's 7.6 percent. The drop occurred in spite of the fact that there were 92,000 less Americans working in October than there were in September. The statistical reason why the unemployment rate dropped three-tenths-of-a-percent was because the U.S. civilian labor force decreased (for a number of reasons) from September's 118,720, 000 to 118,628,000 in October and in September, the official unemployment count was 9,781,000 as opposed to October's count of 9,398,000.

Three significant events occurred months prior to the October 1992 three-tenths-of-a-percent drop in the official unemployment rate: The first occurred on July 16, as a result of Bill Clinton's nomination by the DNC. The second occurred August 20th when Bush was renominated for a second term by the RNC. The third event occurred circa August 24-28th when Hurricane Andrew hit South Florida.

Another unemployment rate anomaly occurred in October, 1983, when Reagan was President. In October of 1983, the unemployment rate dropped 0.4 percent (to 8.8 percent) from September's 9.2 percent in spite of the fact that there were only 23,000 net new jobs created in October. Those 23,000 net new jobs represented only about 0.0225 percent of the 102,039,000 jobs that Americans were employed in at the time.