The state reported today that Michigan’s seasonally adjusted unemployment rate for December was 9.3 percent, down 1.8 percentage points from last December’s rate of 11.1 percent.  While a drop in the unemployment rate is generally considered good news, does the drop in Michigan’s rate really tell us anything?

The unemployment rate is equal to the number of people defined as unemployed divided by the state’s labor force.  The state labor force is the number of people currently unemployed plus the number of people employed.  To be counted as unemployed in this definition, you must be currently looking for work.  If a person is not looking for work because they are retired, a stay home parent, or they are not looking because they do not think any jobs are available, they are not counted in the unemployment rate.  People exiting the labor force for any of these reasons (or any other reason) can affect the rate.

What constitutes Michigan’s change from last year?  In December of 2010, the state’s labor force totaled 4,746,000, with 4,217,000 employed and 529,000 unemployed.  Dividing the number of unemployed (529,000) by the labor force (4,746,000) gives you last December’s unemployment rate of 11.1 percent.

This December, the labor force totaled 4,646,000, with 4,214,000 employed and 431,000 unemployed.  Dividing the number of unemployed by the labor force gives you the current rate of 9.3 percent.  While this rate is clearly lower, it is also misleading to interpret it as a sign of an improved economy.  According to this measure the actual number of people employed in December of 2011 was 3,000 fewer than in December of 2010, hardly a sign of an improved economy.  The entire drop in the unemployment rate is due to people exiting the labor force.

The data released by the state contain two counts of employment.  The count that is used in the unemployment rate calculation is based on a survey of households.  The state also released a count based on a survey of employers.  The employer survey shows December employment up by 67,000 compared to last year, a healthy growth rate of 1.7 percent.

Therefore, the state released two measures of employment, one showing employment essentially unchanged from last year and one showing a 1.7 percent improvement.  Which measure is better?  Economists generally consider the payroll survey to be the better one, so the positive 1.7 percent growth rate is probably the more accurate of the two.  In addition, recent positive news on state revenues plus anecdotal evidence all point to an improving economy.  Therefore, Michigan’s economy does seem to be stronger than it was a year ago.  However, do not cite the declining unemployment rate as the evidence for the improvement.

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