A Lower Unemployment Rate Not Always a Good Thing

Aaron Johnson

Friday, September 21st, 2012

When one says that a falling unemployment rate is actually not good, the natural inclination is to say, "Huh?" Should we not look at a declining unemployment rate as a good sign, especially when most experts did not expect such a drop? Actually, that is not the case here and that's due to a misunderstanding of what the unemployment rate measures. Even though the August job report shows that the unemployment rate dropped from 8.3 percent to 8.1 percent, there were only 96,000 jobs added, which was less than expected and not enough to cover normal population growth.

A look at the employment data shows that the unemployment rate declined due to diminished prospects at gainful employment. While there were slight declines over a number of age and gender demographics, young males aged 16-19 stood out. They left the labor force at a rate of 7.2 percent over the last month, which was much steeper than women of the same age group, which fell by 1.6 percent.

While one could argue that this could be a good sign because that means that they are more likely to attend school, not participating in the labor force at an early age hampers their future earnings potential due to lower productivity rates by not being able to enhance their labor market skills. Unfortunately, this pattern has been occurring over the last decade and is evidence that this generation will likely experience less prosperity than their parents.

It is instructive to note how the Bureau of Labor Statistics collect and analyze employment data. They actually compile a whole series of statistics relating to the labor market, but most people concentrate on the unemployment rate. The unemployment rate is a measure of only the labor force and it does not always accurately reflect joblessness.

The key unemployment rates are seasonally adjusted, so fluctuations that occur due to irregular weather patterns are minimized. When calculating unemployment, they only include active participants that are 16 years or older. Active participants are individuals working part-time or full-time and those actively seeking employment, but are not currently working. They do not include individuals that desire a job, but have stopped looking due to limited opportunities. They are called discouraged workers and result in unemployment being understated.

When looking at solutions to this troubling pattern, we must find ways to enhance our youth's critical thinking skills and better utilize technology. Our economy is shifting from industrial to information, so more value is placed on individuals that possess strong critical thinking skills. With so much information available, firms value prospective employees that are able to access, synthesize and communicate valuable information that can be used to improve profitability and increase market share.

If employers are not hiring, then our youth must create their own opportunities through cultivating an entrepreneurial mindset and leveraging technology. Our younger generation are highly skilled in using social media and various forms of technology. They just need to learn how to transform this knowledge into profitable enterprises. Unlike any other time in history, the cost and barriers of starting a business have never been lower.

However, we must first learn discipline over financial matters, possess a strong work ethic, and appropriately use our creative energies to exploit opportunities in the highly competitive global economy. Distinguish needs from wants when buying consumer goods so that you can build up your savings. Realize that you may have to downsize your expectations of income in finding a more stable job that will complement your own business on the side. It might mean not striking it out on your own and delaying decisions on starting a family.

Through vision, perseverance and following through your plan, one can excel in any economy.

About Aaron Johnson

Aaron Johnson is the assistant professor of economics at Darton College in Albany. In addition to his teaching duties at Darton College, he is also a board member for the Albany-Dougherty Economic Development Commission and the Albany Dougherty Planning Commission.