What is the Real Unemployment Rate, and How Could We Tell?

Ezra Klein flags an article written by Edward Luce in the Financial Times, where Luce notes: “According to government statistics, if the same number of people were seeking work today as in 2007, the jobless rate would be 11 percent.”  Heidi Shierholz of EPI has more details here, including a great list of alternative measures of weak labor market performance.  But to expand on Luce’s point, depending on how you measure it, this rate could be more like 11.4%, with no improvement over the past two years.

The normal mechanism for understanding the percentage of workers who want to work but can’t find work – the unemployment rate – is telling us less and less each month.  Quick recap – here is what the labor economy looks like from a high view:

By definition, you can be one of three, mutually exclusive types – employed, unemployed or not in the labor force – and you can transfer between these types.  The labor force is the sum of employed people and unemployed people.  December 2007 is when the Great Recession started, so we include that as a baseline in each circle.

There are two facts to deal with in this Great Recession.  The labor force hasn’t grown since December 2007 when the recession started, even though we are a much bigger country.  The “Not in Labor Force” has increased in response.  This must mean that the labor-force participation rate has declined.  Let’s graph each normalized to December 2007:

The second, as Arjun Jayadev and I explained back when, is that this is the first time period we have data for where it is more likely an unemployed person will drop out of the labor force rather than find a job.  A lot of the increase in the number of those outside the labor force is the unemployed giving up on work.  Both of these tell us that there is something fishy going on with traditional unemployment figures that just count the unemployed.

Let’s take a look at three ways of counting unemployment.

1.  The official unemployment rate.  Called “U-3″, it is the total unemployed divided by the labor force.   Unemployed are defined as: “Persons are classified as unemployed if they do not have a job, have actively looked for work in the prior 4 weeks, and are currently available for work.”  If a person stops looking for work but are available for work, they end up in the “Not in Labor Force” category.  How to keep track of those who have given up looking for work?

2.  The marginally-attached unemployment rate.  This refers to “U-5″ unemployment.  Marginally-attached workers are those that “indicate that they currently want a job, have looked for work in the last 12 months (or since they last worked if they worked within the last 12 months), and are available for work.”  To get this rate, the BLS adds marginally-attached workers to the labor force as unemployed and recalculate the unemployment rate.

Even this alternative mechanisms of determining unemployment isn’t necessarily working.  If it has been thirteen months since you’ve last looked for work, you are no longer counted as marginally attached.  Given how long this recession has been going, it is likely some people have fallen out of this measure.  We’ll need to come up with something else.

3.  A consistent labor-force participation rate.  Many people have posted graphs on how the employment-to-population ratio has declined.  How can we use that to help give us a clearer picture on the labor market?

A different way to go about it is to look at the labor-force participation rate, which is down to 64% from 66% in December 2007.  How many people would have to enter the labor force to get that percentage up to where it was before the recession?  I subtract these two numbers and calculate the number of people who would need to enter the labor force to keep that rate consistent, and add them to the labor force as unemployed.  I’m taking the the December 2007 labor force participation rate of 66% for this exercise.

What do the unemployment numbers tell us?  Here’s a graph of each during the recession:

The current labor force participation adjusted unemployment rate is 11.4%.

Even though the official unemployment rate peaked in November 2009 and has declined slowly since then, the number adjusted for labor force participation rate hasn’t declined but instead floated in that range.   We can see the marginally-attached rate decline with time, though the labor-force adjusted participation rate stays constant.  That’s bad news.

This is very sensitive to what you consider to be the baseline labor force participation rate – and the assumption that it shouldn’t change.  James Pethokoukis of AEI benchmarks it to the beginning of 2009 and finds “if the labor force participation rate were back at its January 2009 level, the U-3 rate would be 11.0 percent” – contrasted to the beginning of the recession in December 2007, which finds 11.4%.

What would the labor-force participation rate look like with a healthy economy?  I can imagine there will be some big debates in 2012, especially if unemployment decreases and the employment-to-population/labor force participation rate stays the same, about the changes in the economy.  Is this driven by increases in education attainment or retirement decisions?

Interestingly, Larry Mishel finds that the decrease is stronger for those with higher educations over 25.  Labor force participation is down across the board, including people 25-54.  The Federal Reserve Bank of San Francisco found that “trends in retirement and health benefits will probably remain in place and the recession’s severe shock to wealth will likely compel even greater numbers of retirement-age workers to stay in the labor force.” Since it is up across the board I don’t think non-cyclical factors are driving it, but it will be important to watch what people are saying and how they approach these important questions – especially for those who want to wish away the problems in the economy.

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40 Responses to What is the Real Unemployment Rate, and How Could We Tell?

  1. Since permanently high DISemployment is a policy goal of the 1%, shared by both legacy parties and Obama, the shorter version of this post is: Mission Accomplished.

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  5. Very interesting interview with Ron Paul on the Alex Jones Show:

    http://djia.tv/ron-paul/ron-paul-on-the-alex-jones-show/

  6. I note you have avoided consideration of U6 here. What do you think of U6 as a measure?

    • Mike says:

      I’m actually a big fan of U-6 (which includes working part-time for economic reasons), and the paper I did with Jayadev on the labor market linked above almost exclusively uses U-6.

      For the purposes of this exercise, I’m trying to figure out how to find what proportion of the “not in the labor force” should actually be considered to be in the labor force as unemployed – so I’m not specifically looking at part-timers. My next step is “Not in Labor Force, Wants a Job”, which seems to be not included in any of the six U measures (though marginally-attached is a subset of this category).

      • Thanks. I think U6 has better political relevance as it measures economic pain (/anger) more effectively.

      • run75441 says:

        Mike:
        This is a great piece and a topic myself and Laurent Guerby have tackled from time to time. I believe you would have to go back to the Fall of 2001 when Participation Rate was at 66.7% (end of the 2001 recession) and started its decline in order to achieve the numeric you wish to know. We have been in a constant deline since then with Males between the ages of 25-54, in manufacturing, and < then college taking the biggest hit. I would suggest the U3 number recalculated taking this into account is higher than the 11%. Up to 2001, Particpation rate was increasing whether it be male of female or combination of both. I may expland on this at Angry Bear.

  7. Naja pallida says:

    About all I get out of this is that all official unemployment statistics are intentionally misleading, to make things seem better than they really are… and even people I would expect to tell the truth of the matter, are still hedging the data.

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  9. Jay Sullivan says:

    Does “Dropping out of the labor force” simply mean that people have stopped checking in to their state job placement service? In my state if you are looking for a job (not necessarily applying to unemployment but signing up to get access to the state list of job openings) you can register in the “Workforce Development Office”, and stay registered as long as you keep checking in. But if you don’t check in for 60 days the computer drops you from their list of active job seekers.

  10. JOHN PATRICK says:

    What about those of us who are not employed but are into lottery “investments.?” Does this count as being self employed and if I lay myself off can I collect unemployment? Also is it worse if I steal several million dollars or if I STICK UP my local 7-11 for $85.00? When arrested for the 7-11 Stckup can I be let go if I declare myself to be an “investor?”

  11. Clif C says:

    I’ve been approaching this using the long term full employment participation trend extended out to cbo/bls/ssa projections for 2018. The ratio of employment to that trend labor force is nearly a mirror to your adjusted unemployment rate, that is, nearly flat for the last two years; and nearly a year longer than the labor market bottom of any of the last three recessions.

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  13. urownexperience says:

    These are all statistics. Want to know when unemployment becomes a problem? When the demonstrators arm themselves with something other than cute sayings on placards.

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  19. Tambela Vaughn says:

    Hi,

    I am accounting major and I just thought you should knos that according to the Bureau of Labor Statistics:

    “Who is not in the labor force?

    Persons not in the labor force are those who are not classified as employed or unemployed during the survey reference week.

    Labor force measures are based on the civilian noninstitutional population 16 years old and over. (Excluded are persons under 16 years of age, all persons confined to institutions such as nursing homes and prisons, and persons on active duty in the Armed Forces.) The labor force is made up of the employed and the unemployed. The remainder—those who have no job and are not looking for one—are counted as “not in the labor force.” Many who are not in the labor force are going to school or are retired. Family responsibilities keep others out of the labor force.”

    Thus, the reason why the number of people “not in the labor force” has grown is because individuals have retired, gone back to school, or maybe disabled.

    • run75441 says:

      Tambela:

      I believe we both have the same understanding of NILF. I would suspect the growth in it is still more prone to the economy as many would still be in the Civilian Labor Force if the jobs were available. Many who have retired early or have taken disability potentially would have stayed longer. Yes?

      Bill

  20. Tambela Vaughn says:

    Sorry for typos on “a” accounting major and “know” (knos); I am little sleepy, lol.

  21. Tambela Vaughn says:

    Also if you go look at all of the statisticla data on the Bureau of Labor Statistics website you will find the rate actually does base the rate by age, race, gender and several other factors each year. Also the Bureau does exclude the number of discouraged and marginal attached workers each year including 2007. According to BLS, in December 2007 the unemployed plus discouraged workers was 5.2%, which would have equaled 307,800 discourage workers. The total number of discouraged workers for November 2011 was 1,096,000; with a difference from December 2007 of 788,200 people. If you include marginally attached workers in the 2007 data the unemployment rate rises to 5.8%, which would have equaled to 1,231,200 people who were either discouraged or marginally attached. In November 2011 the total number of discouraged or marginally attached individuals from the workforce was 3,687,000; with a difference from December 2007 of 2,455,800. These numbers do not account for the total number of 7,258,000 difference between the total number of people “not in the labor force” between December 2007 and November 2011. In fact it does not account for 3,571,000 of the people included in this category; thus the 11% unemployment rate would not be accurate. The unemployment rate for individuals with Bachelor degree changed from 2.2% in December 2007 to 4.4% in November 2011. This is attributed the economic affects of war, excessive spending, tax cuts and stock market crash which occured between 2001 and 2008. As a accounting major (who is about to graduate with my Bachelor degree in April 2012), I can assure you that when this type of economic turmoil occurs the fallout is gradually seen in the subsequent following years and do not have drastic immediate impact which is why the economy and unemployment rate appear to be better under the president who actually cause this mess. The recovery will take sometime but the numbers do suggest we are starting to see some progress which will also have a gradual impact unfortunately.

  22. Tambela Vaughn says:

    Also, remember President Obama has had to overcome much adversity and opposition to change in the policies which led us to this economic state. The Grand Old Party and the Tea Party has made him pay for winning the election in 2008. Opposing him and fillibustering every single policy he has tried or has had to struggle to implement. These types of people, in the famous words of Fredrick Douglass, “hate all change, except silver, copper and gold change”.

    • run75441 says:

      Tambela:
      As a manufacturing guru who has written Obama asking hime to “lead,” I am disappointed in his inability to be forceful with the perpetual tan man Boehner and his sidekick McDonnell. Most of us who supported him expected to take a stance for Main Street after Main Street bailed out Wall Street. In most cases, he flip flopped and let them gain the initiative.

      • Tambela Vaughn says:

        Run, President Obama is having no problem leading. He is having problems leading individuals who not respect as leader. He cannot force them do what the American people need and have ask them to do. He only compromised with them because on the budget, debt ceiling, and payroll tax cut because he knew the passing pasing

      • Tambela Vaughn says:

        Sorry on my cellphone I will finish at home.

    • NW Luna says:

      Sorry, but offering to cut Medicare and Social Security “entitlements,” and agreeing to bail out Wall Street does not qualify as overcoming adversity.

  23. SaveRMiddle says:

    On some of the BLS charts, a footnote in small print, it states the snapshot is a 12 month view. I know they annually flush their stats with new population estimates but do they systematically (and permanently) move the jobless to their Out of Labor Force category after 12 months? I suspect they do. If I’m right and the stats we see don’t accumulate more than 12 months……..our Jobless Crisis has been even more masked than appears. It would mean the 13 million unemployed we read about today aren’t the same group from 12 months ago.

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