Why Is Michigan Leading the U.S. in Lowering Unemployment?

Here are the 10 states with the fastest falling unemployment rates, using data from the Bureau of Labor Statistics (via WSJ). What's Michigan doing leading the nation in recovering employment?

State    December 2010 Jobless Rate    November 2010 Jobless Rate     Month-to-Month Change    Year-to-Year Change  ↓
Michigan 11.7% 12.4% -0.7 -2.8
DC 9.7% 9.8% -0.1 -2.2
Alabama 9.1% 9.0% 0.1 -1.8
Illinois 9.3% 9.6% -0.3 -1.7
South Carolina 10.7% 10.6% 0.1 -1.7
New Hampshire 5.5% 5.4% 0.1 -1.4
Tennessee 9.4% 9.4% 0 -1.3
Ohio 9.6% 9.8% -0.2 -1.2
Rhode Island 11.5% 11.6% -0.1 -1.2
Wyoming 6.4% 6.6% -0.2 -1.1

The whole story is more complicated than the chart. In most states, the labor force grows every year as families have children and immigrants and citizens shuffle around the country. But Michigan's population is actually declining, and it has been for a while. In fact, Detroit's metro population has slowly declined since the beginning of 2000.

That's why Michigan's unemployment rate will probably fall faster than other states for the next few quarters: It's the shrinking denominator effect. Slowly growing jobs (the numerator in the unemployment rate) divided by slowly shrinking population (the denominator) results in a faster-than-average decline in the unemployment ratio.

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A state like Texas suffers from the opposite problem, if you can call it a problem: "Too many" people want to move there! In the recession, while large states like New York saw flat population growth, Texas grew by almost 700,000 people, only a seventh of whom fell onto unemployment. But if you only pay attention to jobless rates, it looks like Texas is stuck at 8 percent, when in fact the full story is that the state is growing so fast that its impressive job creation can't keep up.

The upshot: Just as the national unemployment rate's recent 0.4% dip misleads us into thinking that job creation has already picked up significantly, states' unemployment rates aren't the best indication of what's happening inside their borders. Keep your eyes on the denominator.