There is little reason to celebrate the dropping unemployment rate because it is largely a numerical illusion.  Yes, the number of people unemployed has dropped consistently over the last four months.  However, the ranks of people that have quit looking for work swelled by an equal amount.

This chart is derived from the US Bureau of Labor Statistics, Table A-1, Employment Status of the Civilian Population.  It shows from 30 September 2011 to 31 December 2011 the official unemployment rate (U3) dropped from 9.0% to 8.5%, which equates to a decline of 0.5% or 597,000 people.  However, the same table also shows an increase of 630,000 people who joined the ranks of the “Not in Labor Force” category.  According the BLS, “the labor force is made up of the employed and the unemployed. The remainder—those who have no job and are not looking for one—are counted as “not in the labor force.””  Consequently, 33,000 more people have joined the no job-not looking category as opposed to being simply being unemployed.

From a Jobenomics perspective, the “functional” unemployment rate (see The 35% “Functionally” Unemployed Rate article) remains at 35% as shown below.

Jobenomics has consistently advocated using employment numbers, rather than unemployment, as a measure of economic health.  As shown above, unemployment numbers and rates can be confusing.  Policy-makers and opinion-leaders need a better yard stick for reporting and decision-making.   Rather than reporting on a “glass half empty” (unemployment), we should focus on a “glass half full” (employment).  Those who are employed are the ones who are contributing to economic growth (see Too Few Pay For Too Many).

Using the same Table A-1, the employment picture has improved by 683,000 over the last four months.  Using the same metrics as we did with unemployment numbers, the civilian labor force decreased 117,000, so the net change is +566,000, which is good news.  If we subtracted increases in population growth (200,000 new US citizens, not shown), the net would be +366,000, which is a reason to celebrate.