Unemployment 101

Shrek:       For your information, there’s a lot more to ogres than people think.

Donkey:    Example?

Shrek:       Example . . . uh . . . ogres are like onions . . . Onions have layers.  Ogres have layers.  Onions have layers.  You get it?  We both have layers.

Donkey:    Oh, you both have *layers*.  You know, not everybody likes onions.  What about cake?  Everybody loves cake!

Shrek:       I don’t care what everyone else likes.  Ogres are not like cakes.

            —Mike Myers as the voice of Shrek and Eddie Murphy as the voice of Donkey in Shrek


Of course, unemployment has been a prime topic of conversation for some time, and there was much focus on it during convention season.  And you may have seen the August jobs report that came out earlier this month showing the “unemployment rate” essentially unchanged at 8.1%.  I thought it worth taking some time to kind of unpack those numbers, because I know I’m often guilty of throwing these things around as a convenient shorthand without really explaining that there’s a lot more to it than what you see on the surface.  I didn’t understand it myself until fairly recently.

The first part of every month, the Bureau of Labor Statistics division of the Department of Labor publishes a report detailing the employment situation for the preceding month.  This is the so-called “jobs report” you’ll hear referred to in the news.  Understand as an initial point that these monthly reports are based on macro-extrapolations from survey data, so there’s some wiggle room that’s sort of naturally baked in.  And also understand that most of the numbers are “seasonally adjusted,” meaning there’s a certain amount of official fudging (how much unofficial fudging goes on on top of that is anyone’s guess), and you can count on any adjustments the Labor Department—a cabinet-level part of the Executive Branch—makes working in favor of the administration du jour.  But these monthly reports are the best information we have, and they pretty broadly accepted on both sides of the political spectrum.

When you hear the news discuss the “unemployment rate,” what they’re talking about is what’s known as “U-3 unemployment.”  If you’ll click on the link to the August report and scroll down to Table A-15, you’ll see six alternative measures of unemployment, conveniently labeled U-1 through U-6.  U-3 is the “official” unemployment figure, and it’s calculated by dividing the “total unemployed” figure into the total workforce.  In the current example, using the figures on Summary Table A, for August 2012 you’ll see unemployed of 12,544,000; if we divide that into a total workforce of 154,645,000, we get the 8.1% “unemployment rate” advertised for August.

Of course, 8.1% isn’t good.  It isn’t appreciably better than it’s been throughout the Obama administration.  It’s above the 8% we were told the stimulus would keep the rate from ever exceeding.  And it’s nearly double the 5.6% Obama promised we’d be at by now.

But that’s not even the most interesting—or most relevant—information the report contains.

First, let’s understand what the U-3 rate does and doesn’t tell you.  Because U-3 is based on the ratio of “unemployed” to the total labor force, it’s wholly dependent on who the BLS includes as “unemployed.”  “Unemployed,” for U-3 purposes, includes only those people of working age who do not have a job, but are currently actively looking for a job.  Twelve-and-a-half-million Americans fit that description.  That’s bad enough.  But it’s far from a complete picture.

U-3 “unemployed” does not include the 2.5 million working age people who want a job and are available for work but have given up looking for work (what the BLS calls “marginally attached to the workforce”).  Nor does it include the 8 million people who want full time work but have been forced to take part-time work for economic reasons (what many call “underemployed”).  These are an additional 10,500,000 people who want to work and who should be working, but aren’t, and the “official” U-3 unemployment rate you hear paraded around the news doesn’t count them.  To get the unemployment rate that includes these folks, you have to look to the U-6 rate (commonly referred to as “real unemployment”), which for August 2012 was 14.7%.  Fully 20,000,000 working age people in this country are unemployed, under-employed, or want a job but have given up looking.

And even that’s not the whole story.

We see from the data on Summary Table A that although the civilian noninstitutional population increased by 212,000 (from 243,354,000 to 243,566,000) from July to August, the total civilian labor force decreased by 368,000 (from 155,013,000 to 154,645,000).  That’s reflected in the labor participation rate of 63.5%, which is down from 63.7% in July, and down from 64.1% in August of last year.  And the number of people not in the workforce at all increased by 581,000 in August (from 88,340,000 to 88,921,000).  In other words, there are more of us here, but fewer of us working.

What this tells you is that a very large and steadily increasing number of people—2,700,000 since August 2011, and counting—are leaving the workforce altogether.  And this is what’s so deceptive about the “official” U-3 unemployment figure of 8.1%.  That number is artificially low because it doesn’t reflect the increasing number of Americans who are simply giving up and dropping out.

One other tidbit is worth noting.  Summary Table B tells us that in August 2012 we added 96,000 jobs, an anemic figure in itself.  Such as it is, that 96,000 number derived entirely from the private sector, which added a net 103,000 jobs, while government lost 7,000.  Same story in July.  Same story in June.   Although the same table indicates that there were a number of government jobs added in August 2011, even then the bulk of the paltry 85,000 jobs came from the private sector.

I’m just saying.

So when you hear these monthly jobs reports talking about the “unemployment rate,” take some time to look at the data behind the story.


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