Why the December Jobs Report Is So Upsetting, in 1 Chart

The unemployment rate and employment rate have stopped mirroring each other.

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The Labor Department reported Friday that the jobless rate fell from 7.0 percent in November to 6.7 percent in December – the largest single-month drop in more than a year, leading to the lowest unemployment rate since late 2008.

The below chart shows why that's not really a good thing.

Source: Federal Reserve Bank of St. Louis

The red line here is the unemployment rate – the share of people who are looking for a job, out of all people in the labor force. The blue line is the employment rate – the share of the population that has a job.

[READ: Employers Added 74,000 Jobs in December]

For much of the two measures' histories, they have closely mirrored each other: when one goes up, the other goes down. But look at the right end of the graph and you see a new trend emerge: the unemployment rate plummets while the employment rate holds steady – a trend that coincides with the recovery from the Great Recession.

In other words, during the recovery, a smaller share of people have reported being unable to find a job, but the share of people who have a job has not grown.

One reason for this trend is a shrinking labor force. The share of the population in December that was either working or looking for work currently stands at 62.8 percent – tied with October for the lowest rate since 1978.

It is true that demographics (in particular, aging baby boomers) are affecting this rate, says one expert.

"Some of the drop can be explained by the aging of the population. A larger percentage of adults is past 55, ages when Americans are likely to be retired," writes Gary Burtless, senior fellow in economic studies at the Brookings Institution, in a commentary on Friday's numbers.

However, he also says that much of the decline has come from younger workers.

"Young adults, who may be discouraged by their job prospects in a weak labor market, have seen increases in school and college enrollment. Many prime-age adults are also discouraged by their job prospects and have withdrawn from the workforce. Most may stay out until their chances of finding employment improve," Burtless adds.

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That means an unhealthy labor market is likely helping to bring the jobless rate down. Indeed, a smaller labor force is one reason why the jobless rate fell in December, despite a disappointing payrolls figure of only 74,000 jobs added. This may mean that, even if the number of jobs added in January exceeds expectations, the jobless rate may also jump.

"This decline in the unemployment rate overstates the improvement in the job market last month and I expect a rise in the rate in January as the labor force rebounds," said Stuart Hoffman, chief economist at PNC, in an analysis of the numbers.

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