Friday, March 08, 2013

Why the Official Unemployment Rate is so Deceiving

The government wants you to disbelieve your lying eyes and accept that our nation's unemployment problem (or, crisis) is actually improving. The jobs problem has been so awful over the past five years that the government desperately needs the illusion of good economic news, and none could be better than promoting the notion that more people are working now than last month or last year.

The problem with this story is that it's all nonsense.

It's not that the government is lying outright; it's that it is cherry-picking the data. It's telling the story in a way that makes things seem much better than they are in reality. By looking at one set of numbers while ignoring other critical ones, you end up with a very different, and more upbeat, picture.

But to do so is highly misleading.

The Federal government counts a person who is self-employed and earns $100 a year as "employed" and it also counts a person who works one hour a week as "employed."

As a result, the only meaningful metric is full-time employment.

To be counted as officially unemployed, a person must have actively looked for work some time in the past month. If you have not looked for work in the past month, for whatever reason, you are not counted as unemployed.

The government uses two different numbers to express unemployment. These are known as the U-3 and U-6 unemployment figures.

U-3 is the 'official' unemployment rate. It measures people without jobs who have actively looked for work within the past four weeks.

However, U-3 does not include so-called "discouraged workers", or those who have stopped looking for work because current economic conditions make them believe that no work is available for them. It also excludes so-called "marginally attached workers", or those who "would like" and are able to work, but have not looked for work recently.

On the other hand, U-6 includes all of the above, plus part-time workers who want full-time work, but cannot find such employment due to economic circumstances.

Under the U-3 definition, the official unemployment rate was 7.7% in February. By this definition, there were 12 million people who said they had looked for a job without success.

But there were also 6.8 million people who said they wanted a job but weren’t even looking, perhaps because they were so discouraged. This may be due to a lack of transportation, a lack of childcare, illness, or some other reason.

Additionally, 8 million people said they could only find part-time work, even though they preferred full-time work. In some cases, their hours have been cut back involuntarily.

If you count those discouraged workers and the involuntary part-timers as unemployed — the U-6 figure — the unemployment rate jumps to 14.3%. That's nearly twice the official figure. Big difference.

A more accurate measure of our unemployment problem is the size of the labor force. This looks at the number of people, ages 16 and older, who are either working or are actively looking for work, while excluding the disabled and those in the military, prison, or hospital.

Using that measure changes the picture considerably.

In February, the labor force shrank by 130,000, which is why the U-3 rate fell to 7.7%. Yes, if you exclude huge numbers of people, the unemployment figure looks considerably better.

The labor force participation rate actually decreased slightly to 63.5 percent in February, from 63.6 percent in January. That's a return to the low of last summer and matches the woeful rate seen back in 1981.

So, while some are celebrating the unemployment rate's drop to a four-year low, the reality is not nearly so encouraging. It's obvious that unemployment is "improving" only if you pretend that millions of American workers no longer want jobs.

If the participation rate were 66.2% — where it was when the economy fell into recession in December 2007 — the jobless rate would be 10.7%. Again, when you exclude millions of people, the unemployment rate looks a whole lot better than it really is.

The number of people reported as not in the labor force rose to 89.304 million in February from 89.008 million in January, which is a new record. It means that 28 percent of the adult population is no longer contributing to the wealth of the nation through their labor.

That's a stunning statistic.

Because more than 3 million people turn 65 each year, the number of retired people is increasing steadily. That obviously has an impact on the decreasing labor force participation rate. But it is not the sole reason for this alarming tumble. Young workers continue to enter the labor force each and every month.

The critical numbers are all heading in the wrong direction. To make pretend this isn't so is highly deceptive and unhelpful.

By ignoring all of this, the government can celebrate a falling unemployment rate while millions of Americans continue to suffer. Undoubtedly, job creation is largely a function of the private sector. Most Americans aren't pining for more government jobs just to improve the unemployment rate.

However, if the government was held accountable for the true unemployment rate and the declining labor force participation rate, perhaps it would have to work more closely with the business community to improve conditions for job creation — most especially for the small business community.

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