Unemployment Rate Dives As People Drop Out Of The Labor Force And Life

The unemployment rate plunged to 6.3% from 6.7%. Let's investigate a peculiar reason why.

BLS Jobs Statistics at a Glance

The BLS reports total nonfarm payroll employment rose by a meager 49,000 in January. Private payrolls only gained 6,000. Manufacturing lost 10,000 jobs. 

The Bloomberg Econoday consensus was an increase of 50,000 jobs. ADP estimated a gain of 174,000 private jobs, missing the mark pretty badly.

Details from the monthly BLS Employment Report.

  • Nonfarm Payroll: +49,000 to 142,631,000 - Establishment Survey
  • Employment: +201,000 to 150,031,000- Household Survey
  • Unemployment: -606,000 to 10,130,000- Household Survey
  • Baseline Unemployment Rate: -0.4 to 6.3% - Household Survey
  • U-6 unemployment: -0.6 to 11.1% - Household Survey
  • Civilian Non-institutional Population: -379,000 to 260,851,000
  • Civilian Labor Force: -406,000 to 160,161,000 - Household Survey
  • Not in Labor Force: +27,000 to 100,690,000 - Household Survey
  • Participation Rate: -0.1 to 61.4% - Household Survey

Initial Reaction

Payrolls are little changed for three months. In fact, they are down from the November recovery peak of 142,809,000 to 142,631,000 in January.

Yet, the unemployment rate plunged. How did this happen?

The Labor Force declined by 406,000. Also, note the population normally rises month-to-month but instead it fell by 379,000.

The BLS made this notice today: "Household survey data for January 2021 reflect updated population estimates." 

Couple the labor force decline with a modest rise in employment (not jobs) and you have a big dip in the unemployment rate.

BLS Error Rate

Since March 2020, household survey interviewers have been instructed to classify employed persons absent from work due to temporary, pandemic-related business closures or cutbacks as unemployed on temporary layoff. As in earlier months, some workers affected by the pandemic who should have been classified as unemployed on temporary layoff were instead misclassified as employed but not at work. However, the share of responses that may have been misclassified was highest in the early months of the pandemic and has been considerably lower in recent months. For March through December, BLS published an estimate of what the unemployment rate  might have been had misclassified workers been included among the unemployed. Repeating this same approach, the seasonally adjusted January unemployment rate would have been 0.6 percentage point higher than reported. However, this represents the upper bound of our estimate of misclassification and probably overstates the size of the misclassification error. 

According to usual practice, the data from the household survey are accepted as recorded. To maintain data integrity, no ad hoc actions are taken to reclassify survey responses.

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