The most recent release of unemployment data has raised some questions, namely, how can we lose 20,000 jobs in the same month that the unemployment rate declined to 9.7%. The answer is simple: The unemployment rate is essentially a made-up figure. And I can give you a much more accurate way to measure the unemployment rate.
First, let’s take a brief look at how the monthly Employment Situation figures are compiled by the Bureau of Labor Statistics. The BLS combines two surveys to compile the Employment Situation. The first survey is the Establishment Survey. That’s a pretty accurate survey, because it consists of asking businesses to provide hard payroll data on the number of existing jobs. The second is the Household Survey, which is where the train runs off the rails.
For the Household survey, they ask if you are employed. If the answer is “No”, they then ask if you if you’re actively looking for a job. If the answer is no, then they just simply take you out of the labor force. They don’t care whether you aren’t looking for work because you know there are no jobs available, or whether you’ve retired and are planning to sail a sloop across the Pacific. If you aren’t actively looking for work, you aren’t part of the labor force. So, the official unemployment rate generally understates–sometimes substantially–the real level of unemployment.
Fortunately, there is a better way to calculate the rate of real unemployment, and the BLS web site conveniently provides you with all the data you need to do it. From here, we only need three items: The Civilian Noninstitutional Population, the Participation Rate, and the number of Employed.
The first thing we need to do is figure out the Labor Force Participation Rate during the most recent period of full employment. If you take the average monthly labor force participation rate from the 70 months between Jan 04 and Oct 08, you get a participation rate in the labor for of 66% of the Civilian Noninstitutional Population.
Next, you multiply the Civilian Noninstitutional Population by 0.66. That gives you the size of the normal labor force at full employment.
Next, you take the number of Employed, and calculate the actual rate of unermployment using the following equation:
1-(Employed/Normal Labor Force)=Unemployment Rate.
So, with this method, we can compare the unemployment level of Oct 08, right before the economy cratered, to last month. When we do so, we get the following results:
Civilian Noninstitutinal Population: 234,612,000
Participation Rate: 66%
Labor Force: 154,843,920
Unemployment Rate: 6.0%
Civilian Noninstitutinal Population: 236,832,000
Participation Rate: 66%
Labor Force: 156,309,120
Unemployment Rate: 12.5%
Note that this calculation for Oct 08 is very close to the official unemployment rate of 6.1%. But as the economy gets worse the official employment rates show greater and greater variance. In other words, the official unemployment rate becomes progressively less accurate as the Employment Situation worsens, substantially understating the actual rate of unemployment. This is, by the way a feature of the BLS’s method, not a bug. It is no coincidence, as our Soviet friends used to say, that discouraged workers fall out of the labor force calculations.
Now, this measure I’ve explained doesn’t tell us anything about people who are working only part-time, when they’d prefer a full time job, so it doesn’t tell us much about underemployment. But it does tell us, based on the recent historical labor force participation rate, what the size of the labor force should be. Once we know that, it becomes very easy to see what the actual rate of unemployment is in real terms, rather than the notional terms provided by the Household Survey.
According the BLS, however, the Civilian noninstitutional population has increased by 2,220,000 people from 234,612,000 to 236,932,000, while, at the same time, the civilian labor force has shrunk by 2,055,000 people from 155,012,000 to 153,455,000. Using the BLS numbers, then, the labor force participation rate is 64.6%. That kind of demographic change might be expected in a couple of years when the baby Boomers begin retiring in large numbers, but for right now, it seems…counter-intuitive.
In any event, 12.5% unemployment is a far more realistic number than the BLS estimate of 9.7%.