Q&A of the Day – How Many New Jobs Need to Be Added Monthly to Keep Pace?
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Today’s Entry: @brianmuddradio Something sounds fishy in the unemployment #’s. How is it that jobs are added but the rate still rises?
Bottom Line: The answer as to why it’s the case that jobs can be added and, yet the unemployment rate can still rise, isn’t fishy. The reason why we experienced a rise in the unemployment rate despite the headline number of new jobs that were added in Friday’s employment report from the Bureau of Labor Statistics kind of is, (though it’s entirely explainable). The short answer as to how and why we need to continue to add a large number of jobs just to keep pace in our economy...is due to population growth. If we don’t add the number of new jobs that’s sufficient to keep pace with population growth, with all other factors being equal (like the labor force participation rate), the unemployment rate will rise. I’ll explain how all this works and what the magic number of jobs added currently is and why we saw the unemployment rate make a significant jump to the highest level in over a year and a half...
There was a lot of attention paid to Friday’s jobs report, not just because it’s always one of the most closely watched economic reports, but because of the seeming anomalies that came out of it. The report showed a headline number of 187,000 jobs being added during the month, which, independent of other factors, is a weak number that had been forecasted by the ADP Private Sector jobs report last Wednesday. Still, the number itself was strong enough to have maintained our previous unemployment rate of 3.5%, yet that didn’t happen and instead we saw the unemployment rate spike to 3.8% - the highest since February of 2022 when the US economy was in a technical recession. So, what happened here? There were two key causes for this. 1) Persistently overinflated initial jobs reports and 2) An increase in labor force participation.
The labor force participation rate still isn’t back to where it was pre-pandemic, however it is still somewhat slowly tracking back in that direction. The participation rate increased from 62.6% to 62.8% during August. That’s the highest since February of 2020 – the last month before the full effect of pandemic era policies took effect. The labor force participation rate is: The proportion of the population ages 16 and older that is economically active: all people who supply labor for the production of goods and services during a specified period. Every one-tenth of one percent in labor force participation equals 263,750 people. With an increase of two-tenths during the month, that means we needed to add a total of 527,500 jobs during the month just to account for the increase in people reentering the labor market – independent of other factors. But then there are those other factors, a la population growth, to consider as well.
To have maintained the 3.5% unemployment rate a minimum of 142,648 jobs would have had to have been added just to keep pace with population growth. The headline number suggests that would have been the case with 187,000 jobs having been added, however the real number wasn’t even close to that figure. The federal government has been chronically overstating the initial job gains in the monthly employment reports only to commonly issue massive negative jobs revisions in subsequent months. August was no different. A total of 110,000 fewer jobs were added in June and July than had been previously reported. This means that the net jobs number added during the month was only 77,000 jobs, and that’s assuming the headline number isn’t revised negatively in future months. That’s a total that’s only about half of what’s needed to keep pace with population growth. So independent of the labor force participation rate you would have seen a slight increase in the unemployment rate. Once the increase in labor force participation was added in, you get the sizable one month jump in the unemployment rate which we saw.
On occasion, over the years, I’ve cautioned people about reading too much into initial government jobs reports because of how poor the methodology is for conducting the surveys in comparison to the ADP Private Sector Jobs report. While the ADP Report doesn’t account for changes in government employment, thus there is a slight difference in what the reports are measuring, 85% of total employment being measured is the same. The government uses Census employees to call out to some HR professionals across the country to gauge changes in employment month-to-month. They then index that data to project initial jobs gains or losses. ADP indexes hard employment data from the 1 in 6 employees which are paid through its software monthly. ADP’s hard data approach has consistently and historically proved far more accurate in initial reporting than the government’s callout survey approach.
It was the one-two-three punch of weak new jobs growth for the month, along with significantly overstated jobs growth from previous months, in addition to a rise in people seeking employment who hadn’t recently been searching for work, which created the significant pop in the unemployment rate last month.