Payroll growth is estimated through a survey of employers — which has pathetically low response rates, so it’s mostly guesstimates until later tested against more accurate data. Meanwhile, unemployment rates come from a separate survey of households.

The first counts jobs, the second counts people. Since one person can hold two or three jobs, while payrolls exclude unincorporated self-employment, unpaid family members, and many agricultural workers, the number of jobs and the number of people working do not necessarily move together.

But the main driver of the paradox right now is the millions of people dropping out of the labor market. It’s not just fewer jobs, but even fewer people in the workforce. That mechanically reduces the unemployment rate, which doesn’t measure everyone without a job but rather people without jobs who are actively looking for work, divided by the total labor force.

If somebody loses a job and looks for another one, that person is unemployed. But if he gives up searching, retires, or otherwise leaves the labor market, the government no longer counts him as unemployed.

That’s what happened in July: fewer jobs, but an even sharper decline in the number of people participating in the workforce.

In other words, the falling unemployment rate may not mean that people are finding jobs. It may mean people have stopped looking for them. In raw numbers, since the labor force peaked in November of last year, 2.4 million people have dropped out of the labor force.

Almost half of that is statistical noise and natural aging — millions of baby boomers reaching retirement age every year. Nearly one-fifth is reduced net immigration — fewer arrivals and more deportations.

That leaves roughly a mysterious one-third, which appears to be concentrated among people aged 55 to 64.

This group is especially interesting because most are still below the traditional retirement age. They’re old enough to leave the workforce but generally young enough that their departure is not automatic.

One possibility is discouraged workers. Older employees who lose a job can have a hard time finding another position with comparable pay and status. After months of unsuccessful applications, some may simply stop searching and live on savings, or on their spouse.

They disappear from the unemployment statistics, but they have not disappeared from the economy.

The second possibility is health. Chronic illness and lingering health problems could be pushing more people out of the labor force before they planned to retire, turning them from potential producers to long-term economic burdens. Sure enough, the number of people on disability has exploded by millions since COVID.

The third possibility is much brighter: People may be retiring early because they can afford to. Older households own a disproportionate share of stocks and real estate, which have been dutifully pumped by 40 years of easy money from the Federal Reserve.

According to the Fed’s own Survey of Consumer Finances, the average 55-64-year-old household is worth approximately $1.57 million. Invested at 6% per annum — a perfectly achievable rate of return given where Treasurys are these days — is more than $90,000 a year without touching a dime of principal.

All three explanations produce the same government statistics but describe very different economies. A discouraged 60-year-old who has given up looking for work is evidence of labor market weakness. A sick 60-year-old leaving work is evidence of a health and productivity problem. A 60-year-old retiring because his 401(k) doubled is evidence of rising wealth.

For now, we don’t have enough information to say confidently which explanation dominates; there’s some evidence for each narrative. For the modern Fed, this is a nightmare because it has adopted an erroneous trade-off between jobs and inflation. Confusing labor market signals leave the Fed unsure how hard it can fight rising prices.

Even in the best of times, the Fed’s choices today, in response to last month’s report, won’t affect the economy for many months given monetary lags — it’s a speeding car at night with no headlights.

WHAT FRIDAY’S JOB REPORT MEANS FOR THE ECONOMY

Fortunately, the new Fed chairman, Kevin Warsh, is intent on true “regime change,” getting the Fed out of the business of manipulating interest rates and likely establishing a price rule for adjusting the size of the balance sheet. That means it won’t even be necessary to perfectly read the labor market tea leaves while fighting inflation — a welcome change from Jerome Powell’s infamous “transitory inflation.”

Peter St. Onge, Ph.D., is senior economist, and E.J. Antoni, Ph.D., is chief economist, at the Heritage Foundation.