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Korobov: The real unemployment rate

BY MICHAEL KOROBOV | FEBRUARY 12, 2015 5:00 AM

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The government has many departments dedicated to the sole purpose of analyzing and reporting economic data. One of the most talked about metrics is the unemployment rate, which is released monthly by the Bureau of Labor Statistics after conducting a survey of 60,000 households.

Last week, Gallup CEO Jim Clifton announced that the December 2014 unemployment rate of 5.6 percent is a “big lie” and is “extremely misleading.” The rate has been gradually trickling down from a high of 10 percent in October 2009.

Clifton was widely criticized for his comments. But he does have a point if you look at how the bureau calculates the unemployment rate.

The unemployment rate is simply the number of unemployed workers divided by the total labor force. The bureau performs several techniques on both of these variables to account for a variety of factors. There are several indexes that tweak the measurements even further, but what is considered the official unemployment rate is called the U-3 index.

Some of the methods that are used to calculate this index are very controversial.

Discouraged workers, or people who have stopped looking for work, are not included in the total labor force. However, in 1994 the bureau changed the definition for what constitutes a discouraged worker. If you are still looking for work but have been unemployed for more than 52 weeks, you are not included in the total labor force. To put this in perspective, the average unemployment duration is approximately 40 weeks. Thus, many people are simply not included in the total labor force even if they are still looking for work.

The bureau also has a fairly loose way of defining who is employed. If you worked at all, even part-time, in the last 30 days, you are considered as employed by the U-3 index. Certainly, this would not produce accurate measures because even if people do occasionally work part-time, they most likely do not make enough to fully support themselves financially.

We can see indications of how the bureau calculates its statistic by the labor-force participation rate, which is at a 37-year low. More than 92 million people are out of the labor force — it hasn’t been this low since February 1978.

But you wouldn’t see any indication of this in the unemployment rate. January’s figure for this year is 5.7 percent, which is considered a relatively positive number.

A website called ShadowStats, which aims to calculate an alternative “fair” unemployment rate, has produced a number of around 23 percent for January. Whether or not this is accurate, it is ridiculous that the discrepancy is so high compared with the bureau’s statistic.

Patrick Barron, who has taught Austrian economics at the University of Iowa, agrees with Clifton and believes that the government “has a methodology that is intended to make government policy appear that it’s not hurting employment.” He believes that including discouraged workers in the unemployment rate would produce a much fairer metric.

The unemployment rate is significant in both politics and capital markets.

When the November 2013 unemployment rate fell just 0.3 percentage points, the Dow Jones jumped 200 points, indicating that investors are indeed sensitive to this figure.

Politically, one of the main selling points of President Obama’s economic stimulus plan in 2009 was that it would prevent the unemployment rate from reaching over 8 percent. When it exceeded this, the president’s critics were quick to turn public opinion against him for failing to deliver the promised metric.

With such a following and influence, the unemployment rate as produced by the bureau cannot be swept aside. With record low labor participation, I believe the way it is calculated does not represent the true status of employment in the country, leading Americans to a false sense of security.


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