Certified financial planner Wes Moss provides personal finance advice and accessible investment strategies. His guest post appears here weekly.
Now that the Olympics are over, Americans can forget about medal counts and get back to obsessing on another number: the nation’s monthly unemployment rate.
The U.S. economy added 163,000 “net new” jobs during July, the 22nd consecutive month of job gains. Sounds like a good employment report, right? That depends on whom you ask.
President Barack Obama pointed to the new jobs and 22 months of employment growth and declared July to be a good month. But GOP challenger Mitt Romney disagreed. His argument: During July the unemployment rate actually rose to 8.3 percent.
How can that be? Simple math. The unemployment rate is calculated as a ratio. There are about 155 million people in the labor force, 13 million of whom are looking for jobs. Thus, 13 million divided by 155 million equals 8.3 percent.
If a significant number of people stop looking for work, as happened in July, the labor force shrinks, and the rate of unemployment is pushed up. For example, if no jobs are lost in August, but 1 million people quit their job searches, the unemployment rate will increase again to 8.4 percent: 13 million divided by 154 million equals 8.4 percent
Oddly, an improving job market can actually result in a higher unemployment rate, at least in the short term. If people start to feel better about the economy and resume their jobs search, but don’t immediately find work, both the labor force and the number of unemployed would grow. The resulting math? The unemployment rate would go up.
Look at the bigger picture
So don’t let a one-time dip, or a one-time rise, in the unemployment rate fool you. This one is better judged as part of a trend.
I hope this quick primer on unemployment stats helps you sort through all candidates’ claims and counterclaims during this election season — and serves as a reminder not to take those claims and counterclaims at face value.
But it also begs the question of how much a role should the unemployment rate play when discussing the economic health of the nation?
What other indicators do you think are more, or less, important?
– Wes Moss, for Atlanta Bargain Hunter