Why The Real Unemployment Rate Is 16.9%
During the last 30 years I do not remember a time when the employment report, as released by the Bureau of Labor Statistics (BLS), has been so closely watched as it has been since the last recession. Each month, when the report is released, it has become a ritual by the media, analysts and economists to strip out key elements which their commentary. In years past the employment report would come and go without much attention by anyone other than the financial media. However, with unemployment high, full time employment hard to come by, and the average American caught in a financial squeeze - the disparity between government statistics, and how Main Street America feels, has risen to peak levels
The most recent release of the employment report by the BLS is sure to stir the pot even more as the average voter gets ready to go to the polls. In the month of September the report showed that 114,000 new jobs were created while the unemployment rate fell from 8.1% to 7.8%. This should be welcome news as on the surface it appears that people are going back to work. However, for the millions of people that are on food stamps, working part time for economic reasons, or are simply no longer counted as part of the labor force - the headline is a lie.
So, what is the real unemployment rate?
In order to answer that question we need to have a basic understanding of how the BLS counts a person as either employed or unemployed and where how that information is reported.
First of all it is crucially important to remember that the employment numbers issued by the BLS are "estimates" that are derived from a one week polling of a sample group of individuals each month. The responses from that sample group are then extrapolated into the population as a whole. Then "seasonal adjustments" are applied to smooth out the effects of different times of the year when jobs are gained or lost due to holiday shopping seasons, inclement weather, etc. As we reported earlier this year, these seasonal adjustments were adding jobs at a time when unseasonably warm winter weather was allowing individuals, who are normally shut in due to inclement weather, to continue working which skewed the numbers higher. That chart below shows the effect of seasonal adjustments on the rather volatile monthly unadjusted data.
In the latest report the actual change to total non-farm employees was an increase of 574,000 jobs. Besides the "seasonal adjustment factor" the BLS also adds a another factor called the "Birth/Death Adjustment" which accounts for the number of businesses that are assumed to have been created (birth) or shut down (death) during the given month. The combination of these "seasonal adjustments" pushed the seasonally adjusted employment level from 133,386,000 in August to 133,500,000 in September showing an increase of just 114,000.
Who Actually Gets Counted?
In order to be counted as unemployed by the BLS one must be:
- Unemployed, obviously, AND;
- Have ACTIVELY looked for work in the prior 4-weeks, AND;
- Are currently available for work.
If you do not fit that criterion you are not counted in the "official" employment report known as the U-3 report as discussed above. Today there are obviously many individuals that do not fit the criteria and are not counted. This is there the U-6 Report comes into play.
The U-6 report shows the total number of unemployed plus all workers that are marginally attached to the labor force as a percent of the labor force. These are persons who are:
- Currently unemployed, AND;
- Want to work full-time, AND;
- Have actively looked for a job in the past 12 months.
A "marginally attached" worker is not considered to be either employed or unemployed, so they are not included in the "official" unemployment number. The U-6 also includes those that are employed part-time because they cannot find full-time jobs. In the month of September one anomaly in the household data is that the U-6 measure of underemployment remained at the 14.7% level reported for August; this is due to a large increase in the number of workers, 582,000 in September, working part time for economic reasons.
As you can see in the chart below the number of individuals who are working "part-time" jobs remains elevated near historic records. Currently there are 8,613,000 individuals in this category.
The problem with part-time labor is that these are generally low paying wage jobs, with no benefits, and leads to dependence on other sources of income. This is why since 2009 there are almost 15 million new participants in the government's nutritional assistance program.
Not In Labor Force
So now that we know who is effectively counted as employed, or unemployed, this leaves us needing to understand what constitutes the civilian labor force. The labor force measures are based on the civilian non-institutional population 16 years old and over. This means that all individuals who are under 16 years of age, or confined to institutions such as nursing homes and prisons, or persons on active duty in the Armed Forces are excluded.
In the BLS reports the "labor force," which is used for the unemployment calculations is made up of those that are employed plus those that are considered unemployed as per the U-3. The remainder—those who have no job and are not looking for one—are counted as "not in the labor force." While many of those have historically been those that are retired or are going to school – since the financial crisis this number of individuals is swelling due to the inability to find work.
During the most recent survey period the number of individuals considered "not in labor force" (NILF) declined by 211,000. However, during the previous three months the ranks of those no longer counted had swelled by 943,000. Since 1975 the median number of individuals that have moved from the labor force count into the NILF Just to put these numbers into context the long term median roll off of individuals into the NILF category has been 55,000 per month. While this roll off should be expected to be somewhat higher as the "baby boomer" generation begins to rapidly move towards retirement - this still does not account for the wide disparity between the long term media and the current 220,000 average annual net change in NILF per month.
The reality is that it is quite obvious that there are large amounts of individuals simply disappearing from the count each month which reduces the size of the labor force. In fact, in the most recent report, the labor force participation rate remains mired at levels not seen since the early 1980's. The difference then is that labor force participation was growing, not shrinking.
Employment To Population
This idea of moving toward full-employment, one of the mandates of the Federal Reverse, by shifting more and more individuals into the uncounted masses is the most important, and least talked about, point relating to the future strength of the economy. While the media, and politicians, certainly ran with the increase of 114,000 jobs today as a sign of economic recovery - the problem is that the working age population is growing faster. This gap further exacerbates the "real joblessness" in America today.
In the most recent reporting period - the working age population increased by 206,000 technically leaving 92,000 without work. Last month the population grew by 212,000 while only 142,000 jobs were created leaving another 70,000 without work. Do you see the problem here? On average, historically speaking, the economy must create in excess of 180,000 jobs every single month just to absorb the growth in working age population.
The problem, economically speaking, is that to foster strong economic growth persons must be employed to produce. The lower the employment levels relative to the population the weaker the production becomes which in turn suppresses economic growth. As shown in the chart - the employment to population ratio has declined to levels last seen in 1984.
In order for the economy to reach "full employment", relative to the working age population, by 2020 roughly 250,000 jobs would have to be created each and every month between now and then. The current low levels of employment, relative to the working age population, presents a serious headwind to economic growth going into the future. However, this also explains the massive surges in disability claims, food stamps and student loans that are being used for consumption rather than education.
Will The Real Unemployment Rate Please Stand Up?
With this background we can now calculate the real unemployment rate in the U.S. using the following data as of September 2012:
- Current Adjusted Civilian Labor Force: 161,790,000
- Number of Unemployed, Marginally Attached, or Working Partime For Economic Reasons: 23,783,130
- Long Term Unemployed (Longer Than 52 weeks): 3,553,872
If we take this data and calculate the ratio of the unemployed, marginally attached and working part-time for economic reasons to the adjusted civilian labor force we get:
(23,783,130 + 3,553,872 / 161,790,000 = 16.9%)
In reality this calculation is still not accurate, and on the low side, as there is currently no clear way to measure the millions of individuals who have disappeared into the abyss of the uncounted. Many of the 88 million individuals that are currently unemployed, and not counted by the BLS, would likely be more than happy to work given the opportunity. However, in the current economic environment, those options are not widely available which is why there is very much a silent "depression" running through the underbelly of this economy. In this depression we don't see the breadlines and soup kitchens simply because they arrive electronically and in the mail.