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Why 8.3% unemployment may not be so great

Job seekers line up to enter a job fair December 02, 2011 in Portland, Oregon. The number for January showed another improvement in the American economy, but is it as good as we think?

Jeremy Hobson: It was exactly one week ago that the government gave us some good news. The unemployment rate dropped last month to 8.3 percent. But some economists say the news isn't as good as it sounds, because some workers have simply dropped out of the labor force.

Marketplace economics correspondent Chris Farrell joins us now to clear this up. Good morning, Chris.

Chris Farrell: Good morning Jeremy.

Hobson: So Chris, is the unemployment rate really dropping, or are people just leaving the labor force?

Farrell: This is always a key question because you're absolutely right. The unemployment rate -- which is at 8.3 percent -- that could reflect that you know, people have been pounding the payment, they finally get work; or they could finally say: you know what? I'm not even going to bother, because no one is hiring. And usually, it's a mix.

But the recent improvements -- in the past several months in 2011 -- reflected a lot of people getting discouraged. So, we got this good number, 8.3 percent. What economists did is they looked at the employment to population ratio, and that measures how many people are actually working. And what it did: it confirmed this was a good number.

Hobson: By the way, what does it mean to leave the labor force? Do you wake up in the morning and go down and file paperwork and say, "that's it for me, don't bother"?

Farrell: Exactly right. You know, it's that image you always have of someone just throwing open their window and just saying, "I'm not going to take it anymore! I've had it, I've had it!"

So what it is, it's a household survey; a survey of 60,000 households by the Bureau of Labor Statistics. And there's these 2,200 trained workers who ask all these questions that are trying to see who's actually looking for work -- you know, you're unemployed but you're looking for work, or maybe you're working part-time and you want to be working full-time.

And then there are people who drop out of the labor force. So some of it can be people not working, people being imprisoned, people being active duty in the military, and then of course, people going to school.

Hobson: So what's the real unemployment rate at this point? Is it 8.3 percent?

Farrell: Well, I like the number of 8.3 percent. Then you can drill down, get more accurate data -- if you make certain adjustments the real unemployment rate's 11 percent. But then you have to make adjustments farther back.

The advantage of 8.3 percent is that it's a consistent time series. It's like the Dow Jones Industrial Average -- is the market up, is the market down. Is the unemployment rate up, or is it down? And the message of the market is, it's down.

Hobson: Marketplace economics correspondent Chris Farrell. Chris, thanks a lot.

Farrell: Thank you.

About the author

Chris Farrell is the economics editor of Marketplace Money.

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