Why Job Growth Might Mean High Unemployment

Private-sector hiring report shows improvement, but new job-seekers might keep the jobless rate stuck above 8 percent.

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Payroll processing firm ADP reported Wednesday that private employment grew by 216,000 last month, a bump of 43,000 jobs over January's figure. ADP's numbers suggest improvement in even the economy's weakest areas: construction has sustained five consecutive months of job growth, and there have also been seven consecutive months of growth in financial services. Both of those industries sustained heavy job losses as a result of the housing and financial crises. Manufacturing, which had seen more than a decade of decline before the recession, also added 21,000 jobs.

[See why accelerating GDP isn't quite a reason to cheer.]

The report sets the stage for a strong jobs report on Friday, but according to Joel Prakken, chairman of economic consulting firm Macroeconomic Advisers, sustained declines in unemployment going forward seem unlikely, even if businesses continue adding jobs. If and when people start rejoining the labor force again, it will mean a higher unemployment rate.

"When a sentiment spreads that the economy is really starting to improve rapidly, we think that people who have abandoned their search for jobs are going to jump back into the labor force, and the participation rate is going to rise," says Prakken.

His comment exposes one weakness of the unemployment rate: it doesn't count discouraged workers—those who have given up the job search—or other people who have left the labor force. A falling unemployment rate, therefore, might mean that potential workers have left the labor force, while a high jobless rate might mean that more people are enticed into the job market by a growing number of jobs.

The labor force participation rate has declined more or less steadily since 2008. In January of that year, 66.2 percent of Americans 16 and over were in the labor force. By January 2010 it was 64.8. In January 2012, it was 63.7.

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That decline in job-seekers may have contributed to recent rapid drops in the unemployment rate, which plummeted from 9.1 percent last August to 8.3 percent in January. According to Prakken, the job growth that the nation has experienced over that timeframe doesn't quite account for all of the improvement in the jobless rate.

Prakken points out that, not long ago, unemployment was over 10 percent. "If you went back ... and told people that the unemployment rate would be pressing 8 percent by now, with the kind of economic and job growth we've had, people would have thought that's not possible," he says.

In other words, even if ADP and the Labor Department continue to show strong, and perhaps even accelerating job growth, the headline jobless rate might not fall accordingly; what's beneath the headline provides a clearer, if more complex picture.