One of the main indicators affecting the Federal Reserve’s decision of whether or not to raise interest rates is the unemployment rate. During periods of strong economic growth and falling unemployment, the Fed is more likely to raise interest rates to cool wage growth and keep a lid on potential 澳洲幸运5官方开奖结果体彩网:inflation. Ho𝐆wever, officials are more likely to l♒ower rates during periods of weakening economic activity and rising unemployment to spur economic growth.

Yet, unemployed people finding new jobs is not the only way in which the unemployment rate can fall. It can also fall because some of the unemployed are no longer looking for work and have dropped out of the labor force altogether. If so, then a falling 澳洲幸运5官方开奖结果体彩网:unemployment rate is not necessarily an indicator of renewed economic strength but could indicate structural weakness within the 澳洲幸运5官方开奖结果体彩网:job market.

Understanding Unemployment Statistics

In order to understand how the unemployment rate is affected, it is important to know how it is calculated. The 澳洲幸运5官方开奖结果体彩网:U.S. Bureau of Labor Statistics (BLS) classifies all persons over the age of 16 as “unemployed if they do not have a job, have actively looked for work in the prior four weeks, and are currently available for work.”

The BLS defines the labor force as “all persons classified as employed or unemployed.” Lastly, the unemployment rate is then calculated by dividing the total number of unemployed by the total labor force and multiplying this number by 100 to calculate a percentage rate. 

Ways Unemployment Rates Can Fall

First, the most obvious way the unemployment rate can fall is that unemployed people find jobs and become employed. 澳洲幸运5官方开奖结果体彩网:Labor force participation remains the same while the number of unemployed decreases an🃏d the number of employed increases.

The second way is that people not currently counted in the labor force become employed. It is always possible for someone not actively looking for work to accept a jo♒b offer. As this would cause an increase in the total labor force while the number of unemployed remains unaffected, the percentage of unemployed would decrease.

Discouraged Workers

Finally, the unemployment rate can fall when those once considered unemployed stop looking for work and leave the labor force altogether. The BLS defines 澳洲幸运5官方开奖结果体彩网:discouraged workers as people not in the labor force who may want work and are available to work but have given up looking. While they have looked for work sometime in the previous 12 months, discouraged workers are not counted as unemployed if they have not looked for work in the four weeks prior to the BLS survey.

As both the number of unemployed and the total labor force decrease in such a situation, it may not be obvious that the unemployment ra📖te actually goes down. But cons♊idering the most extreme example of all those currently unemployed leaving the labor force, no matter how low the total labor force falls, the unemployment rate falls to zero.

While the first two ways in which the unemployment rate could decline are positive signs of economic strength, the final way is actually more 澳洲幸运5官方开奖结果体彩网:indicative of weakness. Let’s look atไ the U.S. situation to determine whether a fa﷽lling unemployment rate is a sign of strength or weakness.

The U.S. Employment Situation

In 2001, the U.S. unemployment rate was sitting at around 5%. Over the next couple of years, it dipped below 5%, reaching a low of 4.4%, before beginning to rise after the 澳洲幸运5官方开奖结果体彩网:global financial crisis in 2008. After reaching a high of 10% in October 2009, the unemployment rate steadily fell and, by September 2019, was at a 49-year low of just 3.5%.

This trend changed dramatically in 2020 due to the 澳洲幸运5官方开奖结果体彩网:COVID-19 pandemic—the unemployment rate quickly rose to 14.8% in April. However, by the end of 2020 and into 2021, the unemployment rate steadily fell, registering as low as 3.4% in January and April 2022.

Yet, the above discussion on how the unemployment rate is calculated—and factors that could affect its fall—should be reason enough to be somewhat skeptical of extreme unemployment numbe⛎rs. In f𝐆act, there is another trend that can make a sharp decline in the unemployment rate look a lot less rosy.

Labor Force Participation Rate

From about the middle of the 1960s until around the year 2000, the 澳洲幸运5官方开奖结果体彩网:labor force participation rate—the labor force divided by the noninstitutionalized, civilian working-age population—rose rather dramatically from just under 59% to more than 67%. Two main contributors to this rise were the increasing rate at which women were joining the labor force and the size of the baby boomer generation entering the workforce. However, the rate fell steadily from the 66%–67% levels seen until late 2008 in the aftermath of the global financial crisis to hover close to 63% as of Q3 2023.

Many 澳洲幸运5官方开奖结果体彩网:economists argue that this decrease in labor participation since 2008 is partly due to the baby boomer generation starting to retire and leaving the labor force. This argument appears to be supported as the prime working age (25 to 54 years) labor force participation rate also declined but then recovered. In 2000, a record 81.9% of this workforce segment participated in April—it dropped initially during the Great Recession and the COVID-19 pandemic but recovered and rose to 80.9% by June 2023.

The Bottom Line

While it may be tempting to think that a drop in the unemployment rate is 🥂a positive sign, the very narrow definition of the officially unemployed is evidence that the interpretation 💝of unemployment rate trends is not unambiguous. One also needs to consider the labor force participation rate.

If it can be established that the unemployment rate is falling because people have given up on trying to find a job, thus leaving the workforce, it may be evidence of a weakening economy and may be reason enough to impact the Fed's 澳洲幸运5官方开奖结果体彩网:monetary policy decisio💞ns. However, the U.S. has not yet experienced this꧙ situation.