Shrink the Numerator
As most know, except those schooled in Every Day Math or government accounting or working as a journalist, a ratio can be decreased by either shrinking the numerator or increasing the value of the denominator. For instance, if a family’s annual food bill eats 20% of the yearly income, then two ways exist to lower the percentage food expenditures take from the paychecks. One option is to reduce the dollars spent on groceries by eating less, shopping at discount grocery stores, growing your own food, or kicking someone out of the house. One or some combination of reduction results in only $15 out of every $100 of income spent on food or a ratio of 15%.
The second option is to find a higher paying job, a second job, or have more family members get a job. For simplistic purposes, let us say that the extra income route increases annual deposits into the checking account from $100 to $200. We still spend our initial $20 on groceries but the ratio of food expenses to income drops to 10%. It seems pretty simple to figure out.
Today the Bureau of Labor Statistics released the monthly national employment report. According to the report, the economy added a net of 120,000 jobs last month. The increase in employment magically dropped the unemployment rate to 8.6% from 9%. The unemployment rate is a ratio calculated by taking the number of people out of work looking for a job divided by the number of individuals estimated to be in the labor pool (employed and unemployed). A person is considered to be unemployed if they are out of work but actively looking for a job. The unemployment rate is also sprinkled with some pixie dust in the form of what is called the birth-death ratio.
So how does a relatively small number of net new jobs compared to the size of the labor pool drop the unemployment rate by .4%? Simple, you can either fudge a decline in the numerator or in the denominator. It is a little difficult to show a great increase in the labor pool (denominator) from month to month. But with a straight face the Bureau of Labor Statistics removed 350,000 unemployed people from the numerator because they have simply given up hope of finding work and they are no longer classified as looking for employment. And hocus pocus, the unemployment rate shows a dramatic decline. On a side note, a good size source of the 120,000 net new jobs came from retailers adding help for the Christmas season.
Here is a thought to leave with, if an addition of 120,000 jobs really lowered the unemployment rate by .4%, then how many new jobs would it take to completely eliminate unemployment in this country? A good estimation would be 2,640,000. Do you really think that makes
sensehttp://www.bloomberg.com/news/2011-12-02/u-s-jobless-rate-unexpectedly-declines-to-8-6-payrolls-rise-by-120-000.html
** Individuals in the armed forces and government non-worker, workers are considered to be part of the employed portion of the labor pool even though they destroy instead of produce.