What Does the 4.7 Unemployment Rate Really Mean?

In May 2016, the U.S. unemployment rate dropped to 4.7 percent, a 0.3 percent decrease from the previous month and the lowest rate since November 2007. Considering the slow job creation in recent months, this decline isn't cause for celebration and suggests many unemployed adults are abandoning the job search. Meanwhile, the recent hiring slump has everyone wondering whether unemployment rates are an accurate measure of economic health.

When the Bureau of Labor Statistics released its monthly Employment Situation Summary in June 2016, the numbers didn't quite add up. While the current unemployment rate should be uplifting when compared to the devastating 10 percent rate in October 2009 at the height of the Great Recession, only 38,000 nonfarm jobs were created in May, and average hires for the first three months of 2016 was only 116,000, compared to 230,000 in the same period for 2015. The strike by Verizon workers also skewed the unemployment rate, as the 37,000 strikers didn't receive paychecks and couldn't be counted among the employed.

The government uses several overlapping metrics to understand the job market, and when viewed together as a complete picture, they suggest the economy is slowing. The unemployment rate only considers workers age 16 and over who have a job or have actively searched for one within the last four weeks. The figure excludes involuntary part-time workers who settle for limited hours because they can't find full-time positions — a segment of the labor force that grew by 468,000 in May.

Another troubling factor is a 0.4 percent decline in the labor-force participation rate at a time when hiring has waned, a clear indication that many workers who are struggling with long-term unemployment are no longer searching for jobs. Economists recognize the diverse factors that drive Americans to stop looking for work, including changes in familial obligations, the decision to return to school or experimentation with self-employment. Yet, economists can't overlook a problematic trend among unemployed workers. Job increases are more likely to benefit college-educated workers, while the number of employed Americans with only a high school education decreased by roughly 3 million over the last decade.

The hiring slump is confusing to many Americans who have received ongoing reassurance from the government that the economy is improving. In fact, the Federal Reserve originally planned to raise the federal funds rate in 2016, an action used to slow a strong economy to prevent inflation. Going forward, economists expect the annual job growth rate to reach about 2.5 percent, helping the nation come out of this static job market.

Analysts speculate that this conflicting unemployment rate developed because employers resumed hiring but kept job creation to a minimum as the economy slowly stabilized after the recession. While wage growth may be lower than it was in the booming 1990s economy, it is currently growing by 2.5 percent, giving Americans the hope of rebuilding a competitive market where workers have their pick of great jobs.

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