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Iowa Unemployment: Exploring the Denominator

December 28, 2009

Iowa’s unemployment edged up to 6.7 percent in November from October’s 6.6 percent. The increase wasn’t statistically significant, so for practicality we can say it remained flat.  However, the unemployment level isn’t too disconcerting, especially since Iowa is relatively low compared to other states.

Iowa’s civilian labor force declined for the third straight month.  In September 1,691 The formulation for unemployment is:

Number of unemployed individuals in the labor force / Civilian Labor Force = Unemployment Rate

The decline in the civilian labor force means the denominator in the above equation slipped. There are a handful of reasons explaining a decline in the civilian labor force. Most of them are not good for Iowa.

  1. Civilian Labor Force only counts those actively seeking jobs. Economists don’t want to count retirees or homemakers who don’t work in the traditional sense, so we exclude someone who isn’t looking for a job. However, it also excludes anyone who has “lost confidence” in the job market. After prolonged unemployment, workers become frustrated, stop looking for work, and may enter higher education. The decline in the labor force comes at the same time of record increases in higher education. It’s not promising since workers don’t foresee improvement and continue to leave.
  2. People may be moving from Iowa for typical or job-related issues. Iowa tends to lose educated populations while western and southern Iowa has just simply been losing population as people migrate to urban cities. Losing population means losing human capital which has obvious negative implications.
  3. Older individuals are choosing to head into retirement, perhaps as part of early retirement incentives offered by the workplace.

What does it mean when the unemployment rate is essentially flat despite a decline in the civilian labor force? That means we’re losing folks who were unemployed, giving some evidence for item #1. Unemployed workers often enroll in school again to train for new careers. We’ve know that community colleges had huge increases in enrollment this past fall.

The recession is nearly, if not already, over. So we’re actually looking for an increase in the civilian labor force. Why? Because once unemployed workers will jump back into the game, foreseeing improvements. That is a signal the labor market is improving as people, who were once disheartened, think they can get a job again. Thirty-two states had an increase in the civilian labor force as those workers may be seeing an improvement.

An interesting implication as workers jump back into the labor market is there are increases in unemployment even though the labor market is improving. As more people are hired, more jump into the labor market but aren’t immediately hired. Thus, the unemployment rate increases temporarily as people are matched with jobs. Iowa’s increase is not that. In fact, the increase was very marginal. Better news would be an increase in the civilian labor force, but instead, many of them are probably still trying to retrain themselves to pursue a new career.

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