By now, everyone should have seen the latest (September 2012) \u201cofficial\u201d unemployment figures \u2013 7.8%.\u00a0 That\u2019s the same as the unemployment rate was in January 2009.<\/p>\n
Hallelujah!\u00a0 The economy has recovered!\u00a0 That means good times are at hand, right?<\/p>\n
Not so fast, Buckey.\u00a0 By itself, the \u201cofficial\u201d unemployment rate tells you very little.\u00a0 It\u2019s one of the least understood \u2013 and, frankly, least useful – measures of how well the US economy is actually performing.\u00a0 Even though it’s one of the most widely quoted.<\/p>\n
What follows is an explanation of what the \u201cofficial\u201d unemployment rate is, how it’s calculated, and what it means.\u00a0 I’ll also explain why it\u2019s not a particularly good indicator of the economy’s overall performance\u00a0 – and I’ll suggest a couple of better ones.<\/p>\n
Here, I’m defining overall economic performance as good based on the number of people voluntarily working full-time.\u00a0 That is, more people working full-time means that the economy is doing well overall, while fewer persons working full-time mean that the economy is doing poorly.\u00a0 If you’re defining good economic performance differently, this article isn’t for you.<\/p>\n
Definitions As always, terms and definitions are dry \u2013 but they\u2019re necessary to understand the subject.\u00a0 The following definitions are paraphrased from the US Bureau of Labor Statistics definitions found here<\/a><\/em> and here<\/a><\/em>.\u00a0 Geographical locations are assumed to be within the 50 US states plus DC.\u00a0 Since we’re dealing with US civilian labor, active-duty military personnel are not counted in the “employed” category.<\/p>\n Employed (E)<\/span>:\u00a0 persons who worked at one or more jobs for which they were paid, regardless of the number of hours worked; who worked at their own farm or business; who worked 15+ unpaid hours weekly at a family business or farm; or who have a job from which they are temporarily absent but to which they will return at a set future date (e.g., paid or unpaid leave of absence, vacation, convalescent leave, sabbatical, etc . . . . )<\/p>\n Unemployed (U)<\/span>:\u00a0 persons who (1) want to work , (2) are physically able to work and are available for work, (3) do not have a job, and (4) who have actively looked for work during the previous 4 weeks\u00a0 (persons\u00a0 awaiting recall to a prior job from a layoff are also counted, regardless of whether they have looked for work in the previous 4 weeks or not)<\/p>\n Discouraged Worker (DW)<\/span> \u2013 persons who (1) want to work, (2) are physically able to work and are available for work, (3) have looked for work in the last 12 months, and (4) did not look for work during the last 4 weeks for the specific reason that they thought no job was available for them<\/em><\/p>\n Marginally Attached Worker (MAW)<\/span> – persons who (1) want to work, (2) are physically able to work and are available for work, (3) have looked for work in the last 12 months, and (4) did not look for work during the last 4 weeks for any reason<\/em>\u00a0 (this category includes Discouraged Workers plus those who have quit looking for work for any other reasons)<\/p>\n Involuntary Part-Time Worker (IPTW)<\/span> \u2013 persons who are employed less than 35 hours per week but (1) want to work full-time, (2) are physically able and available for full-time work, and (3) have an economic reason (cutback in hours by employer or could not find a full-time job) for working part-time vice full-time<\/p>\n Civilian Labor Force (CLF)<\/span>: the total number of those persons Employed plus those persons Unemployed<\/p>\n CLF = (U + E)<\/p>\n Civilian Non-institutional Population (CNP):<\/span>\u00a0 total number of persons 16 or older who are not institutionalized (e.g., prison, mental institution, retirement home) and who are not on active duty with the military<\/p>\n Labor Participation Rate (LPR)<\/span>:\u00a0 \u00a0the Civilian Labor Force (Employed plus Enemployed) divided by the Civilian Non-institutionalized Population, expressed as a percentage<\/p>\n LPR = (U + E ) \/ CNP<\/p>\n A key point to remember is that the Civilian Labor Force does NOT include those who, for whatever reason, have not looked for work during the last 4 weeks (with the exception of those awaiting recall from a layoff to their previous job).\u00a0 Thus those who are temporarily discouraged; who never wanted to work; the long-term unemployed (haven’t looked for work during the past 12 months); and those who are not at this time interested in working because they’re going to school\/taking care of family\/whatever instead aren’t considered.\u00a0 It’s as if they don’t exist.<\/p>\n Which Unemployment Rate Do I Use?<\/strong><\/p>\n No, I’m not being facetious.\u00a0 There are six<\/span><\/strong> different definitions of unemployment rate<\/em><\/a>; each measures something very different.\u00a0 In layman\u2019s terms, here are their definitions:<\/p>\n U1 \u2013 percentage of the civilian labor force that\u2019s been out of work 15 weeks or more<\/p>\n U2 \u2013 percentage of the civilian labor force who are not working because they lost their jobs or completed temporary work<\/p>\n U3 \u2013 percentage of the civilian labor force who are unemployed<\/p>\n U3 = U\u00a0 \/ (U + E)<\/p>\n U4 \u2013 the percentage defined by the sum of the (1) unemployed plus (2) discouraged workers divided by the sum of (1) the civilian labor force plus (2) the number of discouraged workers<\/p>\n U4 = (U + DW) \/ (U + E + DW)<\/p>\n U5 \u2013 the percentage defined by the sum of (1) unemployed plus (2) marginally attached workers divided by the sum of (1) the civilian labor force plus (2) the number of marginally attached workers (remember that the Marginally Attached Workers, or MAW, category includes all Discouraged Workers as a subset )<\/p>\n U5 = (U + MAW) \/ (U + E +MAW)<\/p>\n U6 \u2013 the percentage defined by the sum of (1) unemployed plus (2) marginally attached workers plus (3) involuntary part-time workers divided by the sum of (1) the civilian labor force plus (2) the number of marginally attached workers<\/p>\n U6 = (U + MAW + IPTW) \/ (U + E + MAW)<\/p>\n The \u201cofficial\u201d unemployment rate number you nearly always hear quoted is U3.\u00a0 On occasion, you may hear reference to a “real” or an “un-\/under-employment” rate.\u00a0 That refers to U6 – which is a much better (though still imperfect) measurement of actual economic conditions.\u00a0 However, U6 is not that commonly used.<\/p>\n As a measure of the US economy\u2019s performance, U3 alone is pretty much worthless.<\/p>\n Why U3 Is a Poor Measure of the Economy U3 is nearly worthless for multiple reasons.\u00a0 Let’s look at a few.<\/p>\n First, U3 counts a person performing any<\/em> regular paid work \u2013 even as little as 1 or 2 hours weekly \u2013 as being \u201cemployed\u201d.\u00a0 This means that a factory worker who has been cut from full time to 1 day a week (8 hours per week) is, for the purposes of \u201cofficial\u201d employment statistics, still employed.\u00a0 While that is technically true \u2013 the individual does indeed have a \u201cregular job\u201d \u2013 that job is hardly equivalent to his\/her former full-time job with the same employer.\u00a0 Yet for U3 purposes there’s no difference between the two. \u00a0Further, if an individual has multiple jobs, they\u2019re only counted once.\u00a0 That\u2019s accurate in determining the overall picture of how many persons are employed, but it also distorts the overall picture when it comes to how many jobs are really needed to support the US population.<\/p>\n Secondly, U3 does not even consider marginally connected workers \u00a0\u2013 \u00a0those who want to work, but who have not looked for work during the past 4 weeks for any reason \u2013 to be part of the civilian labor force.\u00a0 During a prolonged economic downturn, this group can become quite large; when economic conditions improve, many in this group will again begin to look for work.\u00a0 Not counting this group makes the situation look better in the short term than it really is, and also ensures that the unemployment picture will be remain poor well after economic conditions begin to improve as these individuals begin looking for work again.\u00a0 This is one of the two reasons U3 typically actually peaks after<\/em> a recovery has begun and not during a recession.<\/p>\n The third reason is that U3 does not account for those who have elected to pursue other endeavors during a downturn, but who will return to the labor market when conditions improve enough.\u00a0 A substantial number of persons elect to return to school, become a stay-at-home mom\/dad, care for a parent or other relative, or perform other activities during an economic downturn.\u00a0 As conditions improve, many of these individuals will begin looking for regular employment again \u2013 typically at the same time or somewhat after the marginally connected workers do the same.\u00a0 This again drives U3 higher while conditions are in fact actually improving.\u00a0 This is the second major reason that U3 typically peaks well after a recovery has begun.<\/p>\n A fourth reason is that due to the voluntary nature of participation in the labor market U3 alone allows some very counter-intuitive and misleading results.\u00a0 One would expect a net job loss to coincide with a rise in U3 \u2013 but that doesn\u2019t always happen.\u00a0 If a large number of persons become discouraged and quit looking for work during a particular month, you can actually have a net loss in the number of jobs <\/em>while at the same see the U3 unemployment rate go down<\/em>.\u00a0 A simple example demonstrating how this can happen is found here<\/a><\/em>.<\/p>\n Finally, U3 doesn’t account very well (if at all) for those working “off the books”.\u00a0 (Neither do the other measures of employment.) Work performed “off the books” is, well, “off the books”.\u00a0 It’s almost always for cash; income and Social Security taxes are rarely paid by either the employer or employee.\u00a0 Employment statistics are often derived at least in part from voluntary population surveys.\u00a0 It’s not a stretch to think that a significant number of those working “off the books” are not answering questions about their recent\/current work honestly in such surveys.\u00a0 The same is doubtless true for employers who employ “off the books” workers to do occasional or regular work.<\/p>\n Better Measures<\/strong><\/p>\n A much better single measure of how well (or poorly) the economy is doing from a jobs perspective is given by the Labor Participation Rate.\u00a0 The Labor Participation Late is simply the fraction of the civilian non-institutional population that is either employed or actively seeking employment.\u00a0 This indicator better tracks actual economic conditions than does U3, and arguably as well if not better than does U6.\u00a0 (U6 is also a much better indicator of actual economic performance than U3, as it more accurately reflects the fraction of persons that do not have suitable employment vice those who are merely employed in some capacity, suitable or not.)\u00a0 And using both U6 and the Labor Participation Rate allows even better insight.<\/p>\n Looking only at the Labor Participation Rate clearly demonstrates that today\u2019s conditions (September 2012) are still substantially worse than conditions in January 2009. Using unemployment rate statistics – even U6 – does not.<\/p>\n The \u201cofficial\u201d unemployment rate U3 is the same for both January 2009 and September 2012:\u00a0\u00a0 7.8%.\u00a0 No difference seen there.<\/p>\n The “un-\/under-employment” rate U6 also is close<\/a><\/em> – 14.2% for January 2009, 14.7% for September 2012.\u00a0 They’re different, but not hugely different.\u00a0 And since U3 is the same, that means the difference is probably largely due to folks working part-time vice full-time – because “improving conditions” would likely mean proportionally fewer marginally attached workers.<\/p>\n So that means we just need a few more full-time jobs – either new ones or by converting part-time jobs to full time ones – and everything will be the same, right?<\/p>\n No, it doesn’t.<\/p>\n
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