The Real Unemployment Rate in the United States

unemployment rateThere is a lot of skepticism when it comes to the unemployment rate. The government says it’s 8.1% (as of April 2012) and so do most in the media. Even the Bureau of Labor and Statistics, the agency responsible for calculating the official unemployment rate says it’s 8.1%. But they also say it’s 9.5% and even 14.5%. How can this be? Which is it? Why are there 3 different unemployment rates? Strange as it may be, there are actually six. The better question is, why are they choosing the 8.1% rate as opposed to the 9.5% or the 14.5%.

I think it has to do with politics. But more on that later. Let’s first see how the unemployment rates are calculated.

As mentioned above, the United States Bureau of Labor and Statistics has six different measurements for calculating the unemployment rate. They are called U-1, U-2, U-3 (official unemployment rate), U-4, U-5 and U-6. Each measurement tells a slightly different story, with U-1 being tightly focused on specific data, while U-6 is much more encompassing.

U-1

This measurement is defined as persons who have been unemployed 15 weeks or longer, as a percent of the civilian labor force. The U-1 rate is very focused and is only concerned about those individuals who have been unemployed for more than 15 weeks. When compared to how many people are filing for unemployment benefits, it can tell the agency at what rate people are finding jobs. The lower U-1 the number, the faster they are finding work. The higher the number, the slower people are finding work and thus the longer they’ll remain on unemployment benefits.

U-2

This measurement is defined by people who have lost their jobs or have completed temporary jobs, regardless of how many weeks they have been unemployed.

U-3

This measurement is defined only by the those who are collecting unemployment benefits. This is the number you hear each and every month. The most troubling aspect of this measurement is that once an individual no longer qualifies for unemployment benefits, they are no longer considered unemployed. This obviously is not an accurate way of measuring the true unemployment rate.

U-4

Based on the U-3 measurement, it also adds into the mix all the people who have stopped looking for work because current economic conditions make them think there are no jobs available (discouraged workers). That’s not to say they don’t want a job, they are just frustrated and have given up looking. The U-4 calculation starts to give a better picture of the true unemployment rate.

U-5

Based on the U-4 measurement, it also adds all the people who would like to work, are able to work, but have not looked for work recently. This could be due to them not thinking there are any jobs available, or perhaps there are no jobs available for which they want to take. The U-5 calculation includes those who are no longer eligible for unemployment benefits, have stopping looking because they can’t find a job, and who are also holding out for something better. For example, an engineer doesn’t want to work at a fast food restaurant, so they remain unemployed until something better comes along. This is perhaps the most accurate estimation for the true unemployment rate.

U-6

Based on the U-5 measurement, it also adds all the part-time workers who want to work full-time, but can’t due to economic reasons (under-employed). When you include these individuals, it becomes very difficult to know who is working part-time because they want to, and who is working part-time because they can’t find anything else. For example, college kids, parents raising kids, seniors and other individuals may not have full-time jobs because they don’t want one. So they shouldn’t be considered under-employed, let alone unemployed. This is not an accurate measurement of the true unemployment rate.

Why are there so many calculations? Well, it depends on what part of the unemployment picture you want to zoom in on. Strangely, the U-3 number is the official unemployment rate you hear the media and President Obama talking about each and every month, but it’s nowhere near the most accurate. The reason being, it doesn’t include any of the people who no longer qualify for unemployment benefits, but who want a job. It also doesn’t take into consideration those who want a full-time job, but are instead working a part-time job because that’s all they could find. Lastly, it doesn’t take into consideration those who’ve become discouraged and have stopped looking, but would take a job if one became available. For these reasons, the U-3 calculation is misleading and is not accurate, because it doesn’t include all the pieces to the puzzle.

Despite the six different ways in which the unemployment rate is calculated, they all tend to trend the same. Meaning, if the U-3 rate goes down, so does the U-5 rate. Conversely, if the U-3 rate goes up, so does the U-5 rate. So then why does the government use the U-3 calculation as opposed to the U-5 estimation? If I had to venture a guess, I’d say it’s purely political. A lower unemployment rate sells better than a higher one. Especially in an election year.

unemployment benefitsRemember when the economy crashed under President Bush in 2008? Something like 700,000 people were losing the jobs each month. Those people went on unemployment benefits and remained on them for quite some time. Just as they were starting to use up their benefits, Congress extended the unemployment benefits to 99 weeks. This gave them more time to find jobs. Well, two years later millions of people reached the 99 weeks and no longer qualified for the benefits. If you don’t want to considered those folks, then you’d use the U-3 calculation because it works in your favor. They simply no longer count and thus artificially make it look like the unemployment rate is lower than what it really is.

Some say the unemployment is really going up, and not down, because the number of people who are leaving the workforce has increased to 88,000,000 as of 2012, the highest its ever been. I’m not sure I agree with those folks. For one thing, the baby-boomers are retiring and leaving the work force; millions of them. Second, all the unemployment curves are trending down. If what they say is true, then the U-5 number would be trending up.

As you’ll see below, the actual unemployment rates from the Bureau of Labor and Statistics shows that the U-5 estimation is consistently about 1.5% higher than the U-3 estimation. As of this writing, these are the latest unemployment rates:

Measure Jan 2012 Feb 2012 Mar 2012 Apr 2012
U-1 4.9% 4.8% 4.6% 4.5%
U-2 4.7% 4.7% 4.5% 4.4%
U-3 8.3% 8.3% 8.2% 8.1%
U-4 8.9% 8.9% 8.7% 8.7%
U-5 9.9% 9.8% 9.6% 9.5%
U-6 15.1% 14.9% 14.5% 14.5%

The U-3 number is considerably lower than the U-5 number, and as such, it’s much easier to campaign on an 8.1% unemployment rather than 9.5%. But in reality, the U-5 number is a far better indication of the true unemployment rate. The U-5 rate includes anyone who is legally allowed to work, physically and mentally able to work, and who wants a job but doesn’t have one. If they don’t have a job, then they are considered unemployed. Nothing else matters. It doesn’t matter what they did before, if they are getting benefits or not, if they are homeless, what their age is, if they’re still living with their parents, what their housing situation is, or how long they’ve been looking. If they don’t work, but want to, they are considered unemployed. The U-3 number only looks at a specific subset of the unemployed and does not show you the whole picture. For that reason, I do believe the unemployment rate is closer to 9.5%.

But here’s the strange part. This is what bothers me. Take a look at the two graphs below. The graph on the left shows the number of people who are currently in the labor force. The graph on the right shows the number of people who are no longer in the labor force. Both over the same time period.

Over the last decade, the number of people in the labor force has remained the same, while the number of people leaving the labor force has steadily been rising. If there are more people not in the labor force, and the number of people in the labor force is staying about the same, isn’t that contradictory? Shouldn’t they be conversely proportional? For example, if I take an apple from one basket and put it in another, the basket I took from would have one less apple. But what these graphs show is that someone must be putting an apple back into the basket I took from. How can this be? The only way this could happen is if there was a influx of workers. It can’t be the baby-boomers because they wouldn’t show up in either graph. They are retired and are thus not in the labor force.

Maybe someone out there knows.

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