The last jobs report of 2011 was perhaps the year's best, with moderate improvements everywhere, from overall employment to earnings. It's not great jobs report, mind you. But in a lukewarm year for job growth, it's a sign that the economy is getting warmer.
All the good news in one paragraph: We added 200,000 jobs in December -- 50 percent better than our monthly average last year. The official unemployment rate fell to 8.5 percent, the lowest in three years. The broader measure of unemployment, which accounts for marginally attached workers, fell to 15.2%, the lowest since Feb. 2009. For the full year 2011, the U.S. economy added 1.64 million jobs, our best in five years. Average hourly earnings were up. Weekly hours were up. Discouraged workers have fallen by more than 370,000 in the last year.
That's the good news, and it's illustrated by the bright red line in the graph below. But here's the problem. The unemployment rate is falling in large part because millions of people have dropped out of the labor market entirely. That point is illustrated by the black line below, which tracks the fading employment-population ratio. If the size of the workforce were the same as when Obama took office, the unemployment rate would be 10.9 percent.
When the strengthening economy attracts more job seekers, the unemployment rate will go up. It's just math. If the denominator (the size of the labor market) starts growing, we'll need the numerator (the number of employed people) to grow much faster to compensate. If I'm wrong, and the participation rate doesn't go up, it will represent a kind of permanent shadow-group of people neither working nor counted as unemployed.