The Official Unemployment Rate (UE)

“In theory, there is no difference between theory and practice.  In practice there is” Yogi Berra

The most watched measure of unemployment in America is the Official Unemployment Rate announced periodically by the Bureau of Labor Statistics (BLS).  Typically, as unemployment increases, the rate goes up triggering intense political and media focus.

That the rate goes up as unemployment increases is true in normal times, but, perhaps, not in our times.  In our times, as workers leave the work force at accelerated rates, the unemployment rate, paradoxically and counter intuitively, actually may go down.

Now we are assured by the BLS that though this may be so, the rate of decrease will not be statistically significant and that it would be statistically improbable that enough workers would flow out of the labor market to trigger a significant downward pressure on the unemployment rate.

We question this assumption.  To begin with, last year the outflow tripled.  Should this year’s labor market performance repeat last years, this outflow would triple again and would number about 3.6 million of the formerly employed.  The resulting numbers would look like this:

Divide the current number of unemployed, 15,260,000  by the current total civilian labor force 154,715,000 (employed plus unemployed). This provides the current rate of .986 or 9.9%.  Now subtract the 3.6 million mentioned above from the unemployed pool and we are left with an unemployed pool of 11,660,000.  Divide this number once again by the new total labor force (154,715,000 minus 3.6 million) or 151,115,000 and the new rate is 7.7%.

Might this happen?  Might the outflow from the labor market triple again? It very well may, as the below tables will help to demonstrate.

Table 1

(The above table from the BLS shows the duration of unemployment in weeks of those counted as unemployed. )

We see from the above table (table 1) that the overwhelming number of unemployed have been unemployed for over 15 weeks.  We also see that this number has grown dramatically from April of last year to the present:  From 6,857,000 to 8,969,000.

We also see from this table that the number of those unemployed for 27 weeks or more has more than doubled over the past year as well: from 3,901,000 to 6,716,000.

Additionally, the BLS reports (not shown on the above table) that the numbers of formerly employed who are now only “marginally” attached to the labor force (BLS nomenclature), and no longer counted amongst the unemployed, now stands at about 2.4 million up from 2.1 million a year ago. Those classified as “discouraged” workers, workers who haven’t applied for a job in the past 4 weeks and, as a result, are also no longer counted as part of the work force, has increased three fold over the past year, from 457,000 a year ago to 1.2 million today.

The clear implication of the above trends is that as we slug through the trough of this great recession, more and more of the formerly employed may become unemployed for longer and longer periods of time and, as a result, may, eventually, drop out of the labor market.  These former workers will join the pools identified by the BLS as the “marginally” attached or “discouraged” workers pools, the pools of the no longer counted.

To give us a taste of what might happen, the fact that the no longer counted do count, we bring you to March 2010.  In March, the unemployment rate stood at 9.7%.  Then, about 805,000 formerly “discouraged” workers, feeling that the economy had improved, reenter the job market to look for work.  Because of their reentry into the job market, they were again counted as “unemployed looking for work” and because of this, the official unemployment rate shot up to 9.9%.

Presumably, should these workers   once again become “discouraged” and withdraw from the job market  (perhaps for four weeks, they may know of no where to apply), they will again no longer be counted as “unemployed”,  and the official unemployment rate will drop again to 9.7%.  In other words, as workers leave the labor market, the official unemployment rate would go down!

We mentioned this to the BLS and they cautioned us not to put to much stake in these short term fluctuation. Presumably, the market will right itself and, once again, perhaps in the long haul, the rate will go down when unemployment goes down.  Our point, however, is that we may be entering a new labor market reality, a reality where the traditional calculation of the unemployment rate simply may not work and may, in the long haul, reflect the opposite of what is actually occurring in the labor market.

That this may be the case is entirely the result of how the BLS defines unemployment and who is counted in that pool.  And though the BLS nomenclature makes academic sense, it does not make common sense and may, in our times, lead to statistical nonsense.  This phenomenon may very well become more and more exacerbated as time goes by.

The BLS does publish unemployment rates other than the official rate which do include a broader range of former workers into the pool of unemployed.  One such rate is the U6.  But who, aside from policy specialists and labor economists, has even heard of U6?

The official rate is, by and large, the only one quoted in major media.  It is the American Rate.  And it is not stated with disclaimers or fine print.

That the official unemployment rate may provide a severe distortion of employment in America can only be corrected by a change in the way the BLS reports its official rate.  By sticking to their historic definitions and equations, they may very well be doing us all a great disservice.

The central issue faced by the labor market is that in our times the unemployed are unemployed for longer and longer periods of time – long enough to become discourage and “drop out” of a narrowly defined labor market.  The following are the trend numbers which represents the percent of workers unemployed for over 27 weeks:

4/2009     12/2009      1/2010     2/2010     3/2010     4/2010

27.5%      39.8%        41.2%      40.9%      44.1%     45.9%

And though a percentage of the unemployed may become employed and a portion of the discouraged may from time to time reenter the labor market, the aggregate numbers over time show that the pools of the marginally attached and discouraged continue to dramatically increase.

And, since the job market options on American soil may simply not improve, alternative measurers of unemployment need to be mainstreamed so that all – citizens and their representatives – are aware of the extent of our labor problem.  U6 is currently at about 18%.  And though this number may not be as precisely defined as other BLS measures, it is far closer to what is going on out there then the official rate.

“The future ain’t what it used to be.” Also Yogi Berra