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More Jobs Lost. Unemployment Down. What Gives?

4963930A Labor Department report out this morning found that employees cut 247,000 jobs in July. While this was relatively good news – it represented the fewest lost jobs in a year – it still meant nearly 250,000 jobs lost for the month. Yet the unemployment rate actually fell, from 9.5 to 9.4 percent.

Which may leave one asking: Why did the unemployment rate fall even as more jobs were lost?

The short answer is that the labor force shrunk. David Wyss, chief economist for Standard & Poor's, suggested that students who had been looking for summer jobs essentially gave up, moving them out of the category of unemployed. (They were no longer looking for work, after all.)

"If they haven't found something by the Fourth of July, they spend the rest of the summer at the beach," he said.

The Wall Street Journal's Sudeep Reddy offered the longer answer to this question in a blog post:

The payroll figures — jobs lost — comes from a Labor Department survey of employers. The unemployment rate is measured through a separate survey of households — asking people whether they have a job, whether they want a job and whether they searched for a job (among other things). If people drop out of the labor force, the unemployment rate can decline because fewer people would be considered jobless.

The July household survey showed the civilian labor force shrinking by 422,000 and employment falling 155,000. That translated into 267,000 fewer people listed as unemployed. The labor-force participation rate fell 0.2 percentage point in July to 65.5%

As Reddy notes, the decline in the unemployment rate doesn't mean unemployment won't hit 10 percent – in part because signs of improvement in the economy may result in more people entering the workforce, expanding its size overall and effectively pushing the unemployment rate up.
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