Thursday, February 20, 2014

Work force declines affecting fall in unemployment rate in Colorado

In December, the unemployment rate in Colorado fell to the lowest level seen since 2008. It was 5.9 percent for the state in December, compared to 6.1 percent during November 2013, and 7.5 percent during December 2012.

It is often assumed that the unemployment rate relies primarily on job creation numbers, but the size of the labor force is just as important. 

We know that in recent months, the labor force has shrunk in Colorado, and this has been a significant factor in the declining unemployment rate. 

The second graph shows both the total labor force size the total employment, according to the household survey.  Note that in December, the labor force was back to March 2012 levels. 

So, the labor force has not changed much in more than 18 months, and with some moderate growth in total employment during that time, this has really pushed down the unemployment rate, and has tended to give the impression that growth growth is more robust than it really is. Note that, according to the household survey, employment remains 40,000 employed persons below the July 2008 peak. 

The third graph looks at year over year change in labor force size. I've smoothed this out by using a 3-month moving average, and in this case, we find that over the past two months, the labor force has gone down, year over year. Indeed, during December, the labor force was down by about 10,000 people, year-over-year. 

The next graph looks at the labor force by month going back about ten years. This makes it easier to see that December 2013 had a smaller labor force than December 2012. December 2013's labor force was about the same size as December 2011, although it was certainly up from 2009 and 2010 levels. This just shows us that even if we're taking seasonal factors into account, the labor force is quite flat.

Theoretically, the unemployment rate can go down even when employment is falling, as long as labor force falls by more than employment. Fortunately, this has not been the case. While the fall in the labor force size has exaggerated the employment gains, there have nonetheless been increases in employment. The last graph shows that December 2013's employment level was the highest level seen in December since 2008. In other words, December 2013's employment level was at a 5-year high. Total employment grew, year over year, by 30,000 employed persons, which is a moderate rate of growth compared to most months since 2011.