Demystifying the Unemployment Report

Today's unemployment report showed the unemployment rate came in at 10.0% for the month of December, unchanged from last month. This report contained a mix of good and bad news. On the bad side, nonfarm payrolls fell 85,000, which was outside the low end of the consensus range, suggesting a pretty big miss. This was largely due to an unexpected decline in government nonfarm payrolls of 21,000. Many economists predicted government hiring to be positive. The worst part about this report, however, was the number of discouraged workers - those who left the labor force because they gave up in looking for a job. This number came in at 929,000, up 44.7% from last year.

These discouraged workers are keeping the unemployment rate down because they are shrinking the labor force. If these workers stay discouraged, it's possible our total labor force will be smaller than before the recession even if the unemployment rate comes down. The chart below (taken from bls.gov) shows how the number of discouraged workers tends to stay elevated for sometime, even after a recession. Including all discouraged workers in the labor force, the unemployment report would have came in at 10.5%

The good news in this report was the 47,000 increase in temp hirings. Temp hirings, like jobless claims, are a leading indicator about the future health of the labor market because firms tend to hire temporary workers coming out of a recession before they offer full-time positions.

Many people seem to believe in the "jobless recovery" idea, in which firms will refrain from hiring this time around because they'll boost productivity instead. From what I've seen in the data, jobless recoveries are  fleeting and are just a cyclical effect. In other words, its common for productivity to spike up coming out of a recession and then come down as the recovery takes its course. Firms cannot rely on productivity gains through cost cutting for the long-term. As the economy heats up they'll be forced to hire more workers to meet increases in demand.