Economics for One

Putting the Lie to the Unemployment Rate

January’s unemployment numbers made it painfully obvious that the government’s unemployment calculations are a mess.

In case you missed it: the January unemployment number came in at 9.0%, which is a decrease of 0.4% from December’s 9.4%.  But the other interesting statistic in January was the net number of new jobs: 36,000.

Now, if 36,000 new jobs can lower the unemployment rate from 9.4% to 9.0%, then 810,000 jobs should eliminate unemployment altogether.  And conversely, a loss of 8,190,000 jobs would make everyone in the US unemployed.  Put another way, it suggests there are a total of 9,000,000 eligible workers in the United States.

But here’s the problem: there are something like 140 million employed people in the US.  And if that’s the case, then it should take closer to 560,000 jobs to swing the unemployment rate by 0.4%.

So how do we reconcile these numbers?

The answer lies in the way the government determines the unemployment rate.  Each month, the government interviews approximately 60,000 households, representing about 110,000 people from around the country, to determine their employment status.  If a member of the household is not employed, or is employed only part time, the interviewer asks whether they have been looking for a job in the past month.

If someone has stopped looking for work, or is unable to look for work, they are categorized as “marginally attached to the workforce,” possibly as a discouraged worker.  But curiously, discouraged workers–people who have given up looking for work–are not considered unemployed.  So if enough people are unable to find a job for a long enough period of time, and stop looking until the economy improves, they drop off the government’s radar.

Frankly, this is a dumb way to determine the unemployment rate.

Imagine this example: In a town of 1,000 adults, 800 are working, and 200 have lost their jobs with a recent factory closure.  Suddenly the unemployment rate is 20%.  Because the town is small, there is not a lot of new job growth.  After a few weeks, half of the laid off workers realize they will not find a new job until another company moves to town, so they begin to change their plans.  They move in with relatives, help around the family store, help raise younger children, take some evening classes, or just sit around with their friends.  According to the government, the number of potential workers in the town has now decreased from 1,000 to 900.  Of that 900, 800 have jobs, and 100 do not.  So now the unemployment rate is 11%

This type of statistic makes it seem as though things have improved.  But in fact, the situation in the town is pretty dire.  Looking at a trend (20% unemployment previously, now reduced to 11%), we might think there is decent job growth and a healthy economy in this town.  But in reality, things are very bleak, and our statistics are misleading us.

So what happened in January 2011?  The number of adults who are not in the workforce (i.e. they are neither employed, nor unemployed) was 85.5 million–an increase of over 2 million people since January 2010, and an increase of 300,000 since December 2010.  In fact, the number of people not in the workforce increased by 167,000 people more than the underlying working-age population growth from January 2010 to January 2011!  In other words, working-age, qualified adults are shifting their plans and waiting out the recession.

So while it’s true that a small number of new jobs were created, what’s more significant is the number of people who are no longer counted.  And every single one of those people who are no longer being counted is, in fact, unemployed.  The fact that they are not counted in some government statistic doesn’t mean they aren’t members of our communities–it just means our statistics are wrong.


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