Q: How can the unemployment rate drop if we lost jobs?

A: On Friday the Labor Department reported that the unemployment rate for June fell to 9.5 percent from 9.7 percent. The news was initially greeted with enthusiasm, evidence of improving economic conditions in the wake of a severe recession. However, it turns out that there were actually 125,000 net jobs lost during the month, due to the termination of some temporary census workers and to painfully labored private sector hiring.

So how is it that we lost jobs but the unemployment rate declined?

The Bureau of Labor Statistics conducts two monthly surveys to ascertain the level of civilian employment in the U.S.

The first of these, known as the establishment survey, collects payroll data from employers and reports the number of jobs created or lost. The second, called the household survey, queries a sampling of individuals age 16 and over about their job status, and then classifies them as employed, unemployed, or not in the labor force.

Information from the two surveys is analyzed and combined into the jobs report released each month that presents a picture of labor conditions in the American economy.

The June report tallied 14.6 million people unemployed, or 9.5 percent of the work force. However, according to the Household survey, another 2.6 million workers who are able and available for work (euphemistically referred to as "marginally attached to the labor force") are excluded from the count and hence do not show up as unemployed.

About half of these individuals are considered discouraged workers who have stopped looking for work because they believe no jobs are available.

The rest are temporarily out of the labor pool due to school or family responsibilities. Adding these potential workers into the total yields an unemployment rate of 11 percent, which is actually higher than it was one year ago when the recession technically ended. If one also includes people working part-time who want full-time work, the rate jumps to 16.5 percent of the workforce who are unemployed or underemployed.

Thus the seeming paradox: as workers lose hope about the job market and exclude themselves from the queue of applicants, the unemployment rate falls even though the total number of jobs declines.

Expect the complement of this effect once these folks resume their job quest, returning to the labor force and temporarily boosting the unemployment rate even as more workers are hired.

Get answers to financial questions on Wednesdays from our columnists who work in the financial services industry. Chris Hopkins is vice president, investments, at Barnett & Co. Inc. Submit questions to his attention by writing to Business Editor John Vass Jr., Chattanooga Times Free Press, P.O. Box 1447, Chattanooga, TN 37401-1447, or by e-mailing him at jvass@timesfreepress.com.