The August employment report is out.  The unemployment rate is down (from 8.3% to 8.1%), but the labor force dropped a lot (by over 350,000 people).  This always seems to confuse people, and the press.  It also provides fodder for both political parties, since the Democrats can cite the dropping unemployment rate and rising employment of about 100,00 jobs, while the Republicans can cite the dropping labor force and say people are "dropping out" of the labor force because they are "discouraged".   There is truth in much of this, if not all of it, but it is very confusing, and perplexing.  But what is not often understood, is some of the underlying demographics behind all this, and the methods people don't understand.  A few major points:

  •   First, a long run trend that hardly anyone is paying attention to is the aging of the population, because the baby boom (born between roughly 1945 and 1965) is now reaching retirement age.  It is remarkable, but in the overall population 45% of the population was over age 45 in the year 2000, but in 2012 we now have over 50% of our population over age 45.  Many people hit by the recession are in these older groups, baby boomers, who may be taking early retirement, so could be leaving the labor force and retiring.
  •   Second, what is often not mentioned is that the overall job growth total cited (96,000 jobs) is the total of private employment and public employment. 
    • What is important is that we have seen 30 straight months of growth in PRIVATE sector employment, since June 2010, a total of 4.6 million private sector jobs created in those 30 months. 
    • Also in this same period of 30 months, there has been a drop of 1.1 million PUBLIC sector jobs, and in those months public employment has dropped in 27 of the 30 months, remarkably.  
    • What this means is that we have been following a policy of "austerity" at the public levele, cutting government employment working against the private sector growth, which holds back the economic growth.
    • To see this another way, if we had lost these public sector jobs, our unemployment rate would hypothetically be 7.4% today (all else equal).
    •  One more point rarely considered is how confusing and bad the data is for employment/unemployment is.  First the data usually reported is drawn from two sources, often conflicting (from both households, and firms).  Second, as economists known well, unemployment is a "lagging indicator" which means it is one of the last economics factors to turn around.