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%. Â 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. Â And conversely, a loss of 8,190,000 jobs would make everyone in the US unemployed. Â 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. Â 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. Â Each month, the government interviews approximately 60,000 households, representing about 110,000 people from around the country, to determine their employment status. Â 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. Â But curiously, discouraged workers–people who have given up looking for work–are not considered unemployed. Â 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. Â Suddenly the unemployment rate is 20%. Â Because the town is small, there is not a lot of new job growth. Â 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. Â 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. Â According to the government, the number of potential workers in the town has now decreased from 1,000 to 900. Â Of that 900, 800 have jobs, and 100 do not. Â So now the unemployment rate is 11%
This type of statistic makes it seem as though things have improved. Â But in fact, the situation in the town is pretty dire. Â 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. Â But in reality, things are very bleak, and our statistics are misleading us.
So what happened in January 2011? Â 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. Â 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! Â 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. Â And every single one of those people who are no longer being counted is, in fact, unemployed. Â 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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