Why Looking at the “Official” Unemployment Rate Is a Waste of Time

| October 19, 2012

By now, everyone should have seen the latest (September 2012) “official” unemployment figures – 7.8%.  That’s the same as the unemployment rate was in January 2009.

Hallelujah!  The economy has recovered!  That means good times are at hand, right?

Not so fast, Buckey.  By itself, the “official” unemployment rate tells you very little.  It’s one of the least understood – and, frankly, least useful – measures of how well the US economy is actually performing.  Even though it’s one of the most widely quoted.

What follows is an explanation of what the “official” unemployment rate is, how it’s calculated, and what it means.  I’ll also explain why it’s not a particularly good indicator of the economy’s overall performance  – and I’ll suggest a couple of better ones.

Here, I’m defining overall economic performance as good based on the number of people voluntarily working full-time.  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.  If you’re defining good economic performance differently, this article isn’t for you.

Definitions

As always, terms and definitions are dry – but they’re necessary to understand the subject.  The following definitions are paraphrased from the US Bureau of Labor Statistics definitions found here and here.  Geographical locations are assumed to be within the 50 US states plus DC.  Since we’re dealing with US civilian labor, active-duty military personnel are not counted in the “employed” category.

Employed (E):  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 . . . . )

Unemployed (U):  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  (persons  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)

Discouraged Worker (DW) – 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

Marginally Attached Worker (MAW) – 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  (this category includes Discouraged Workers plus those who have quit looking for work for any other reasons)

Involuntary Part-Time Worker (IPTW) – 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

Civilian Labor Force (CLF): the total number of those persons Employed plus those persons Unemployed

CLF = (U + E)

Civilian Non-institutional Population (CNP):  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

Labor Participation Rate (LPR):   the Civilian Labor Force (Employed plus Enemployed) divided by the Civilian Non-institutionalized Population, expressed as a percentage

LPR = (U + E ) / CNP

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).  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.  It’s as if they don’t exist.

Which Unemployment Rate Do I Use?

No, I’m not being facetious.  There are six different definitions of unemployment rate; each measures something very different.  In layman’s terms, here are their definitions:

U1 – percentage of the civilian labor force that’s been out of work 15 weeks or more

U2 – percentage of the civilian labor force who are not working because they lost their jobs or completed temporary work

U3 – percentage of the civilian labor force who are unemployed

U3 = U  / (U + E)

U4 – 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

U4 = (U + DW) / (U + E + DW)

U5 – 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 )

U5 = (U + MAW) / (U + E +MAW)

U6 – 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

U6 = (U + MAW + IPTW) / (U + E + MAW)

The “official” unemployment rate number you nearly always hear quoted is U3.  On occasion, you may hear reference to a “real” or an “un-/under-employment” rate.  That refers to U6 – which is a much better (though still imperfect) measurement of actual economic conditions.  However, U6 is not that commonly used.

As a measure of the US economy’s performance, U3 alone is pretty much worthless.

Why U3 Is a Poor Measure of the Economy

U3 is nearly worthless for multiple reasons.  Let’s look at a few.

First, U3 counts a person performing any regular paid work – even as little as 1 or 2 hours weekly – as being “employed”.  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 “official” employment statistics, still employed.  While that is technically true – the individual does indeed have a “regular job” – that job is hardly equivalent to his/her former full-time job with the same employer.  Yet for U3 purposes there’s no difference between the two.  Further, if an individual has multiple jobs, they’re only counted once.  That’s 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.

Secondly, U3 does not even consider marginally connected workers  –  those who want to work, but who have not looked for work during the past 4 weeks for any reason – to be part of the civilian labor force.  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.  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.  This is one of the two reasons U3 typically actually peaks after a recovery has begun and not during a recession.

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.  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.  As conditions improve, many of these individuals will begin looking for regular employment again – typically at the same time or somewhat after the marginally connected workers do the same.  This again drives U3 higher while conditions are in fact actually improving.  This is the second major reason that U3 typically peaks well after a recovery has begun.

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.  One would expect a net job loss to coincide with a rise in U3 – but that doesn’t always happen.  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 while at the same see the U3 unemployment rate go down.  A simple example demonstrating how this can happen is found here.

Finally, U3 doesn’t account very well (if at all) for those working “off the books”.  (Neither do the other measures of employment.) Work performed “off the books” is, well, “off the books”.  It’s almost always for cash; income and Social Security taxes are rarely paid by either the employer or employee.  Employment statistics are often derived at least in part from voluntary population surveys.  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.  The same is doubtless true for employers who employ “off the books” workers to do occasional or regular work.

Better Measures

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.  The Labor Participation Late is simply the fraction of the civilian non-institutional population that is either employed or actively seeking employment.  This indicator better tracks actual economic conditions than does U3, and arguably as well if not better than does U6.  (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.)  And using both U6 and the Labor Participation Rate allows even better insight.

Looking only at the Labor Participation Rate clearly demonstrates that today’s conditions (September 2012) are still substantially worse than conditions in January 2009. Using unemployment rate statistics – even U6 – does not.

The “official” unemployment rate U3 is the same for both January 2009 and September 2012:   7.8%.  No difference seen there.

The “un-/under-employment” rate U6 also is close – 14.2% for January 2009, 14.7% for September 2012.  They’re different, but not hugely different.  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.

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?

No, it doesn’t.

The Labor Participation Rates for the two months are substantially different.  In January 2009, per the BLS the number Employed was 142,187,000; the Civilian Labor Force was 154,236,000; and the Labor Participation Pate was 65.7%.  This means that the Civilian Non-institutional Population in January 2009 was approximately 234,758,000.

In September 2012, the number Employed was 142,974,000; the Civilian Labor Force was 155,063,000.  However, the Labor Participation Rate in September 2012 was substantially lower – 63.6%.  And over 4 years, the US population also grew substantially.  This means that the Civilian Non-institutional Population in September 2012 was approximately 243,810,000.

Had the Labor Participation Rate remained 65.7%, the Civilian Labor Force in September 2012 would have been approximately 160,183,000.  For this size Civilian Labor Force, a 7.8% U3 unemployment rate would have required the number Employed to be 147,689,000 – or roughly 4,715,000 more people employed today than actually are Employed.  Further, examining U6 indicates that another 800,000 or so full-time jobs would also be required to remove enough individuals from the Involuntary Part-Time Worker category to lower U6 from 14.7% to 14.2%.  Thus more than 5.5 million additional full-time jobs are needed today in order to make today’s economic conditions equal those in January 2009.

Very obviously, economic conditions aren’t as good today as they were in January 2009; they’re still substantially worse.  That’s easily seen looking at the Labor Participation Rate alone – even though the “official” unemployment rate U3 for both months is identical.  And looking at the Labor Participation Rate plus U6 gives the whole picture.

Category: Economy

Comments (17)

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  1. AW1 Tim says:

    I have my own real-world indicator of how well things are going.

    It’s a simple look at the number of meals served in our local soup kitchen, the number of requests for assistance from our food bank, and the number of folks using our clothing exchange.

    In the past four years, all three have seen substantial increases. In fact, participation in church suppers, pot-luck suppers and “pay what you can” suppers is also up noticeably around where I live.

    I’ve been involved with these programs almost since their inception. All of us can see the new faces each week, see how things are going in a very real-time sense. We don’t need government figures to tell us what’s going on.

    Nice article, Hondo. Thanks for putting that together for us.

  2. Veritas Omnia Vincit says:

    Hondo, outstanding work dude, what the hell was your major? Economics?

    I will have to remember to be quite certain of my numbers moving forward, I agree with Tim there are many indicators that tell where we are currently and most of those are not positive.

    Your LPR analysis is the one I always find interesting because it relates economy of scale which is difficult for a lot of people to comprehend when the numbers are so large. Pointing out that 18 million people who should be working are not based on a 2 % drop puts the numbers in perspective.

    I also suspect there are a lot of folks who have personal analogies to reinforces the weakness of the current economy. I am saddened to see two more competing companies close. While that means more work for my company and a better long term outlook for us it also means that about two hundred people are out of work in Connecticut and Massachusetts who earlier this year had jobs in a manufacturing capacity. Manufacturing jobs using skilled labor force create jobs that make families stronger and create actual middle class wealth and advancement.

    Again, really nice work and clearly explained for the non-economics majors among us.

  3. OWB says:

    It is chilling that our government is employing so many folks to figure out ways to misrepresent data so that things appear to be better than they really are. The production and distribution of meaningless information is not a legitimate function of government.

    Here’s a radical idea – how’s about picking an age (18 maybe?) and count everyone above that age as either employed full-time or not. If you want to make a footnote about the number of full-time students, part-time workers, not-seeking-employment-stay-at-home parents, and such – fine. But the unemployment rate should simply be based upon the number of folks who are of an age when they should be self-supporting compared to those within that group who are not fully employed.

    For purposes of calculating an unemployment figure, I don’t personally care whether someone is unemployed because they are a student, disabled, raising children, or whatever – if you are not employed at a paying job, you are unemployed. The reality is that whatever that figure is, those who are working are supporting those who are not.

    In spite of the published figures, we all know that they are nonsense and meaningless. Yet we continue to pay people outrageous salaries to produce information that is useless?

  4. Hondo says:

    OWB: I think the number you want is readily available; it’s called the Employment-Population Ratio. (Since the BLS concerns itself with the civilian labor market it does exclude active duty military. And since they’re otherwise occupied, it also excludes those who are institutionalized.) It can be found at

    http://data.bls.gov/timeseries/LNS12300000

    For 20 years (1988-2008), the Employment-Population Ratio stayed between about 61.5% and 64.5%. However, in 2008, it started dropping. Still, it stayed above 61.5% until November 2008. By January 2009, it had dropped to 60.6%; it continued dropping until Nov 2010, when it bottomed at 58.2%. It’s been oscillating around 58.5% +/- 0.3% ever since. In Sep 2012, it was at it’s highest point since it bottomed out – 58.7%.

    It’s been below 59% for the last 3 years. That alone tells me that whatever we’re trying now to “fix” the economy – just ain’t workin’.

    VOV: no, I’m not an econ major. But I do like messing with numbers; the trends can be interesting; add a little history and often they can help one to understand what’s really happening. Often, what you hear or read is only a small part of the story – and sometimes, it’s either just plain wrong, is slanted, or is a deliberate lie.

    I never did like it when people lied to me. I still don’t.

  5. UpNorth says:

    “That alone tells me that whatever we’re trying now to “fix” the economy – just ain’t workin’.” But…but… Instupid insists that millions and millions of new jobs have been created by The Once.

  6. Hondo says:

    They have, UpNorth – almost 0.8 “millions”. We’re just another a little short yet – about 5.5 million short.

  7. WOTN says:

    When addressing the unemployment rate, participation rate, and the rest of the data from BLS, one must also take into consideration the anomolies of recent months. In August and September the BLS magically found millions of new employed positions while simultaneously dropping hundreds of thousands of unemployed males from the labor force.

    These changes in status/statistics simply do not add up to their own published reports for those months. While less than 300,000 found work during the period and more than a half million become newly unemployed, the number of people employed grew by 873,000 (officially) in September alone, and the number of people that want work fell by 230,000.

    I.e., the political appointees of Obama at BLS have created a new genre of art: Numerical Fiction.

  8. Just an Old Dog says:

    I just know what I see. In my household alone 3 of 4 adults cant find work, another 2 are disabled.

  9. Insipid says:

    @5- It’s amazing that you actually argue with me even before I show up. I guess i shouldn’t be surprised, you see a phantom Obama, why shouldn’t you argue with a phantom insipid?

    As far as the article goes. It amazes me the lengths you will go to to deny reality. The unemployment rate when Raynaldus Reagan was re-elected in a landslide was 7.3% so how does the .5% difference turn morning in America into a national nightmare? It doesn’t. Obama’s handling of the economy is much more impressive then Reagan’s considering all the cowboy had to do was adjust the interest rate to quell inflation. Obama inherited an economy with interest rates already close to zero and a global melt-down.

    As far as the standards go, I don’t care which one you use, so long as it is the same standards for everyone. As soon as the employment numbers change for the better you guys want to change standards and then proclaim that the real unemployment rate is 82% counting people out of a job, working part time looking for full time work, counting people who are sometimes unhappy with their job and counting people who sometimes upon occasion would rather sleep in.

    And i would have no problem with THAT standard if you employed the same standard all the time. Even when unemployment is down to 4% there is STILL the case of people who drop out of the labor pool or are working part time etc. As long as the standard for judging remains the same all the time, it’s fair to use whatever standards you want. But you want to suddenly change the standards because you’ve lost your X number of months above 8% talking point. Too bad.

    Oh and anyone who thinks that it was better in 2009 when we were losing 850k jobs a month then now when we’re gaining 140k jobs a month is just delusional.

    And the reason why I haven’t been posting here much is because I’ve been volunteering 30 to 40 hours a week for Obama for America. It is looking very bad for Republican’s in Ohio. I can scarcely see any Republicans early voting so far. And our early voting numbers are WAY up from 2008. I don’t see how Republican’s can win it without Ohio. Not that i’m going to relax for the next three weeks. So what will your excuse be when Obama wins again? Affirmative Action, or will you graciously admit that he won fair and square? Naaaah.

  10. Hondo says:

    insipid: There you go again – arguing the irrelevant and missing the point entirely.

    It is true that the unemployment rate in Oct 1984 was 7.4% (according to the BLS, you’re slightly off above). That’s also irrelevant. As noted above, though popular U3 is a virtually meaningless statistic.

    Reagan’s economic policies did not cause a massive drop the labor participation rate during a period of high unemployment. The labor participation rate stayed constant at 63.7% +/- about 0.3%. That was true while unemployment peaked, then declined. What that means is that the fraction of the population employed or looking for work remained about the same throughout.

    In contrast, the current administration has seen continuing fall in the labor participation rate since day one. In January 2009, the participation rate was 66.2%. In September 2012, it was 63.6%. And the trend is a near-perfect linear plot with a slope of about -0.64% per year.

    Three years and nine months is a sufficient track record to determine whether these policies are working. They’re not. And a continued decline in the fractions of Americans willing to work of more than 0.6% per year is NOT a good thing. It certainly doesn’t bode well for the future, economically, if current conditions and policies continue.

    To re-iterate: Labor participation rate is the key statistic. It shows how many actually want a job much more accurately than does U3 employment. U6 is the next best indicator. And if Obama had managed to maintain the labor participation rate and U6 unemployment he’d inherited, or to regain them, there would be about 5.5 million MORE Americans working full-time than there are today.

    In short, we’re still in deep dung; the situation ISN’T getting better, it’s still declining; and the apparent improvement is because people are giving up hope and quitting vice finding jobs. Someone who convinces people that it’s not worth their while to try is NOT what America needs in a POTUS.

  11. Hondo says:

    Addendum: the above was a quick-and-dirty hand calculation. But I got curious, so I fired up Excel and ran the stats for linear correlation on the Obama administration labor participation rate numbers.

    Using linear regression, the slope estimate for the drop in LPR under the Obama administration during it’s 44 months in office as of the end of October 2012 is a sustained -0.0494% per month, or -0.593% annually. The correlation coefficient is -0.96997.

    What that means is that a linear equation – the simplest possible mathematical model – is a virtually perfect fit for the data. You just don’t see very many better “fits” to a linear model when using linear correlation on real world data than that.

  12. NHSparky says:

    While we’re at it, sippy–please explain how while RCP has Obama up 2 in Ohio, most of those polls are almost two weeks old.

    The most recent polls have Romney either tied or ahead by 1-2 points.

    Ohio is considered a “toss up” state as of now. So is NH, but I can tell you based on what I’ve seen and those I’ve spoken to, Romney will win here by 3 points at least. And even if Romney loses Ohio, the fact that WI and MI are still in play, as is PA, more than makes up for the possibility of losing OH (which, BTW, ain’t happening.)

  13. UpNorth says:

    Instupid apparently didn’t see that California was left out of the BLS report. Not surprising, he only sees what confirms his bias.
    He’s still trotting out the 850K jobs a month lost bullshit, and he knows that isn’t true.

  14. Yat Yas 1833 says:

    Sippy!!! I see you’re still drinking the kool-aid. Having worked for gov’t for 20+ years, I know how they can manipulate the numbers, I’ve done it. Tell you what, let’s see who else is an analyst here, give us data and I can guaranty I can prove the exact opposite of what the other analyst says.

    BTW, does your mom know you’ve gotten out of you closet again?!

  15. Econchick says:

    LOL, I was in middle of explaining Reagan years to some revisionists on a forum I’m on called USMB and as I googled to get definitions of U-3 back then (since U-6 didn’t exist) this website came up near the top of my google search, except it looks like a military site. The article is so long and well done that it looks like an official econ site instead!

    Very impressive grasp of economics gents (and ladies.)

    But while I’m here, I do have to point out to Insipid that it is inappropriate to attribute the rate (7.3%) until after the poor guy has been inaugurated and gotten a chance to submit his budget to Congress. By the time Reagan did that, the affects from Carter’s stagnant years had driven the rate up to 10.8%.

    And Insipid, don’t forget Reagan drove down those double digit rates for inflation, for interest rates, and for the unemployment number I just mentioned that came about as a result of big spending, liberal polices. It was called stagnation.

    • Alberich says:

      “Stagflation,” as I remember. (It being considered an anomaly back then, since inflation was supposed to reduce unemployment…but we managed to get both at the same time.)

      • Econchick says:

        Yep and yes. That’s what Keynes had claimed which is why it’s comical that libs still follow that idiot’s theories.

        We happen to be fighting all over the internet today about Obama crashing and burning in the polls, especially on the economy. Fun trying to explain it to cool aid drinkers.

        But finally even the most un-informed are starting to grasp it.

        There’s hope for us yet!