The Unemployment Rate Is Hiding How Weak the Job Market Has Become

The July jobs report is notable not simply because employment declined, but because the numbers we traditionally use to judge the health of the job market are becoming much easier to misread.

The United States lost 23,000 payroll jobs in July.

May was revised from 129,000 jobs to just 63,000. June was revised from 57,000 to 20,000.

That means another 103,000 previously reported jobs disappeared from the statistics once better information arrived.

Yet the unemployment rate actually fell, from 4.2 percent to 4.1 percent.

That sounds contradictory until you look at the labor force.

Another 264,000 people stopped participating in it during July. The labor force participation rate fell to 61.4 percent, near a five-and-a-half-year low. Since January, participation has fallen 0.7 percentage point and the employment-to-population ratio has fallen 0.5 percentage point.

Someone who stops looking for work is no longer counted as unemployed.

So the unemployment rate can improve even while fewer people are working and employers are eliminating more jobs than they create.

There is another important change happening underneath these numbers.

Economists have traditionally estimated that the United States needed roughly 70,000 to 90,000 new jobs each month just to keep unemployment stable.

That threshold has collapsed.

Researchers at the San Francisco Federal Reserve and Brookings now estimate that somewhere around 25,000 to 50,000 jobs per month may be enough to maintain the current unemployment rate, with some projections suggesting the number could eventually approach zero or even become negative.

The reason is not that the economy suddenly became extraordinarily efficient.

The labor force stopped growing.

Lower immigration, an aging population and declining labor force participation mean fewer people are entering the pool of available workers. When fewer people are looking for jobs, the economy does not need to create as many jobs to prevent the unemployment rate from increasing.

Technically, that means the old benchmark really does need to change.

But it also creates a dangerous perception problem.

A few years ago, an economy regularly creating only 20,000 or 30,000 jobs per month would have been recognized immediately as an extremely weak labor market.

Today we can call roughly the same number “breakeven” because the number of people participating in the labor force has fallen enough to make it mathematically sustainable.

That does not make the job market stronger.

It means the bar moved downward with it.

July makes the problem especially visible. Employers cut jobs, previous months were revised substantially lower, financial employment continued falling, retail lost workers, and labor force participation declined again.

At the same time, initial unemployment claims remain historically low and employers are not conducting mass layoffs across the economy.

So this is not yet a traditional unemployment crisis.

It looks more like a hiring crisis.

People who already have jobs are relatively likely to keep them. People trying to enter the workforce, change careers or find something after losing a job are facing an economy producing remarkably few new opportunities.

That distinction matters because the headline unemployment rate was designed around people actively participating in the labor market. It cannot tell us much about the people who have stopped trying.

We should probably be paying much closer attention to labor force participation, the employment-to-population ratio, hiring rates, job openings and revisions to payroll numbers instead of treating the unemployment rate as a single score for the economy.