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Jobs Paradox? by Paul Krugman

August 7, 2009 - By New York Times Writer Paul Krugman

Some readers have asked how it’s possible for unemployment to fall when the economy is still losing jobs, albeit at a slower rate. The answer is a bit annoying.

First, the jobs number and the unemployment number are based on different surveys — a survey of establishments in the first case, a survey of households in the second. Sometimes employment rises by one measure while falling by the other, although it happens that this month there isn’t much difference in the jobs number. (The establishment survey is considered a more reliable measure of month-to-month job changes.)

Second, how do we measure unemployment? Contrary to what some correspondents think, it doesn’t have anything to do with receipt of unemployment insurance. It comes, instead, from a survey in which people are asked whether they’re working and, if not, whether they’re looking for work. And what this month’s data show is a relatively large rise in the number of people “not in labor force” — neither working nor looking for work. That’s how the unemployment rate can fall even with fewer people working.

Isn’t U6, the broadest measure of unemployment, supposed to include people who are discouraged and stop looking? Yes — but at least according to the survey, that’s not the reason more people have dropped out of the work force.

Basically, though, what you need to bear in mind is that these are imperfect measures, subject to a fair bit of noise. When the trend in the labor market is very strong in either direction, the measures move together. But when you have the kind of scene we have now — the employment situation is drifting down, but not plunging — occasional mixed signals are likely. No big deal.

The basic story is that things are sort of stabilizing — but they’re definitely not improving yet.