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Why You Shouldn't Trust Unemployment Rates

The U3 unemployment rate is a subtle and highly misleading statistic. We should be looking at the employment to population ratio instead. And it really, really sucks.

It’s 2012.  The Great Recession is over.  But it doesn’t really feel like it’s over, does it?  You keep getting good news about the unemployment rate (until last Friday, anyway), but somehow the good news doesn’t ring true.  Why not?  Because the good news is a crock of hooey, that’s why.

Let’s forget about unemployment rates for a minute and look at a much more interesting and revealing statistic, the employment to population ratio.  This is the percentage of people, age 16+, not in the military and not in the pokey, who have jobs.  Take a look at these numbers direct from the Bureau of Labor Statistics, series LNS1230000, Employment-population ratio:

Notice anything?  That’s right, the employment to population ratio has been flat since late 2009.   No change.  None. Niente. Nada.  Zip.

So why is that, when all these politicians and journalists are feeding you rosy stats on job creation?  Because the population is increasing, that’s why, as this series shows, and the rate of job creation has been just sufficient to keep the employment-population ratio stuck at about 58.5% -- but not sufficient to take us back to pre-recession levels of 63%.  To do that, you would need to create over eleven million jobs!  (Explanation: current 16+ noninstitutional population is 242.6 million  To get us back to the December, 2006 employment-population level of 63.4% from the May, 2012 level of 58.6%, it would take (.634 - .586) *  242.6  = 11.6 million jobs).  Good luck doing that at a rate of 69,000 per month (May's feeble increase), especially with the population increasing at a rate of 170,000 per month.   Yes, nous sommes foutu.  You couldn’t have said it better yourself.

And that’s it in a nutshell.  

So, why all this mooing and lowing about “the unemployment rate”?  I have no idea.  It is a subtle and not very telling statistic, and I believe that if people understood it better, they wouldn’t take it very seriously.  And here is why.

The Bureau of Labor statistics regularly reports six different unemployment rates, but the one reported in the press as “the” unemployment rate is U3.   

The Bureau of Labor Statistics (BLS) derives its labor force and employment statistics from the monthly Current Population Survey (CPS) survey conducted by the Bureau of Census, which surveys a sample of approximately 60,000 households.  Based on this survey: 

  • Persons serving in the military or confined in institutions are excluded, and persons under 16 years of age are excluded.   What remains after these exclusions is the population eligible for inclusion in the civilian labor force. 
  • The civilian labor force is then defined to include only those persons who are either (1) employed (definition here is a little sticky as it includes persons who work part time, are temporarily absent from work for various reasons,    and a few other oddities) or (2) unemployed, which means that they have not done work for pay or profit in the survey period;  have actively looked for work in the last four weeks (meaning that they have applied for work or made inquiries – just looking at web sites and help wanted adds alone does not count); and are available for work.  Note that despite what many people think, “unemployed” status does not require that a person be collecting unemployment insurance, have been laid off, or for that matter have worked a single day in his life. 
  • The ratio of unemployed persons to the civilian labor force (which includes both employed and unemployed persons, as defined above), expressed as a percentage, is the U3 unemployment rate
  • The accompanying flowchart should answer any lingering questions you may have about how these statistics are arrived at.       

So it should be clear at this point that the U3 unemployment rate can go up, down, or remain the same regardless of how many people are actually employed, and tells you absolutely nothing about total employment, or what proportion of the population is employed:  

  • If many people give up looking for work, they will no longer be counted as unemployed, and the unemployment rate will go down, even though the number of employed persons has not changed at all, or has even declined.  Yes, you can have fewer people working and a declining U3 unemployment rate at the same time.

  • If many people start looking for work, the U3 unemployment rate may go up, even though the number of employed persons has not changed, or has even increased.  Yup, even with more people working, the unemployment rate can still go up.
  •  

    Thus, a change in the U3 unemployment rate is utterly meaningless unless you understand WHY the change has occurred, and not all that interesting even then.   Any politician or journalist who attaches any significance whatsoever to a change in the unemployment rate without explaining why it has occurred is either mendacious or stupid.  Or possibly both.   But fear not, there is an easy way to find out why U3 has changed, for what little such information is worth.   Just go to http://www.bls.gov/ and read the Commissioners Statement.  Cut out the middleman!

    This post is contributed by a community member. The views expressed in this blog are those of the author and do not necessarily reflect those of Patch Media Corporation. Everyone is welcome to submit a post to Patch. If you'd like to post a blog, go here to get started.

    Stephen A. Sussman June 04, 2012 at 05:47 PM
    Yes! Well Done Chuck ! The employment- to- population ratio is a far superior statistic to the typical Politicans hogwash, followed closely by the Media Nitwits' regurgitations. It reminds me of my Grandpa Mike. One of his shopworn, but true cliches :" Figures don't lie, but liars figure. " He also grew up in a city that had a corrupt Democratic Machine, which had gotten into office by replacing a corrupt Republican Machine. He despised those politicians. He used to say : "Those (expletive deleted) guys are so crooked , they'll have to screw them in the ground when they croak!" Although the corruption he was referencing was and unfortunately, still is , a very serious matter...well, at the time, as a young boy, I burst out laughing, having imagined a rather pompous ceremony, complete with music and speeches, followed by these guys actually being screwed into the ground!(: Maybe, I can start a chain of Funeral Parlors that perform this service; with all the crooks out there, it's probably one of the few things that's recession- proof!
    Chuck Anesi June 04, 2012 at 08:02 PM
    I like that. Screw them into the ground when they croak. Yes, we'll need a lot of lag bolts for the current crop. Obama and his media stooges were babbling about U3 declining when it was doing so just because people were giving up looking for work. But it's not just Obama, because Romney has been wailing about the May rise in U3, even though it resulted largely from more people entering the workforce. A little honesty now and then from both sides would be nice. One thing is clear though, and that is that the rate of job creation is pathetically low, the employment-population ratio is not improving, and Obama obviously has no bloody clue what to do about it. But does Romney? Making it easier and less costly to hire and fire people would be a big help. But the current crop of boneheads in Washington is doing exactly the opposite, insisting on ever more benefits for employees and ever more protections against layoffs, and then stupidly wondering why we are not seeing more job creation.
    Stephen A. Sussman June 04, 2012 at 09:47 PM
    We need some "sensible" protections/regulations for workers, just as we need some "sensible " protections/regulations for management... as well as the "Markets" I have been in both positions during the course of my life; and , as is usually the case, given "human nature, we have to balance Rights and Responsibilities, we have to have Checks and Balances, as the "framers" of our Constitution wisely envisioned. We can't put up with intellectually and/or financially corrupt unions or businesses. We don't have to become Sweden, but we don't have to regress to the " Gilded Age" either. Lazy and/ or incompetent Workers under unfair regulations can rapidly drain businesses; however, greedy and/or incompetent Management under unfair regulations can sink businesses as well. Just look at the crisis of the Auto Industry.( My great-uncle worked in a Ford Plant.) I certainly don't claim to be an expert; but, from what I learned of the situation, there was plenty of blame... all around.
    Ed Lambert June 04, 2012 at 11:35 PM
    What I have yet to see explored: the possibility that we cannot employ all the people who wish to work. It seems to me quite possible that technology, the unfettered ability to move jobs out of the country, etc. might mean that we will no longer see the opportunity for work for everyone who wants it.
    Stephen A. Sussman June 05, 2012 at 12:53 AM
    Excellent points, Ed. Back approximately 40 years ago, when some of the people at the top of the pyramid and their agents, who literally made their reputations and income from being ani-communists, were magically very forgiving, when they saw the opportunity to make large profits by investing in places like Red China. In the process, they helped destroy America's manufacturing base, which along with G.I. Bill , had helped make our economy the envy of the world and provided millions of jobs for our fellow citizens. Just coincidentally,of course, some of these same families had invested in Nazi Germany and helped their German Colleagues either escape tribunals like the one at Nurenburg or arranged to have their hands slapped. During the 1930's, some of them were even involved in an attempted coup against the legally elected government of FDR and wanted to establish an American form of Fascism with a General as it's Figurehead. Fortunately, General Smedley Butler believed in our Constitution and informed the Authorities. They had no true allegiance to our beloved country...they just happened to have some of their enterprises here.
    Chuck Anesi June 05, 2012 at 06:30 AM
    Steve, I agree, don't want to go back to the 19th century. We all want social protections. Just saying that making it hard for business to form, operate, expand, hire, and scale back is not a good recipe for more employment and better economic growth. I could cite a gazillion examples, but my favorite example of a stupid and useless burden is Sarbanes-Oxley, a reaction to a few cases of fraud in large public companies. The simpletons in congress spent a lot of time perseverating over that trivial problem (easy for investors to protect themselves, just diversity), fiddling while the fires of the housing bubble were burning, and giving us a real catastrophe. Then after the catastrophe the dufuses came up with Dodd-Frank, which has in general achieved the opposite of everything it intended to do.
    Chuck Anesi June 05, 2012 at 06:54 AM
    Ed, I think you are right. Technology has been making skills obsolete and displacing workers for a long time (think the Luddites smashing power looms), but for most of my lifetime, it has affected mainly unskilled or semi-skilled labor. Recently though it has hit skilled labor and white collar workers hard. Check imaging, document imaging, electronification and computerized workflow have slashed and burned through back office operations. Middle management is being automated away. Even lawyers are being hurt by discovery software and automation of routine legal tasks. These are all big changes, and the Washington response -- blaming the employment situation on a lack of aggregate demand -- is just downright dumb.
    Inner Voice June 05, 2012 at 11:45 AM
    With regards to Ed's comment, "It seems to me quite possible that technology, the unfettered ability to move jobs out of the country, etc. might mean that we will no longer see the opportunity for work for everyone who wants it" I totally disagree. We humans are a creative bunch and there is always something productive that idle hands can find to do. People just need to apply themselves and they need to get educated. It is true that there are a lot less of some types of jobs but new types of jobs will be created. People have to be flexible.
    Chuck Anesi June 05, 2012 at 03:10 PM
    Inner voice, I think you and Ed both have good points. Certainly many of the people whose skills are rendered obsolete can retrain for different work, and we need a LOT more emphasis on education. That said, it takes a very long time to retrain a laid-off roofer as a database analyst, and some people just don't have the aptitude or disposition for the kinds of jobs that are available. You can't teach a cow to sing. Remember when Jethro Bodine decided to become a brain surgeon? I think Ed was referring more specifically to the problem facing those at the low end of the intelligence and education curves. In the old days they could have been a hired man on a farm, or pushed a wheelbarrow at a construction site. I can't see a lot of such jobs existing in the future, at least not that justify paying even minimum wage. We do need to at least start thinking about that problem.
    Ed Lambert June 05, 2012 at 03:45 PM
    Neither side of "the great divide" wants to see workers treated poorly. Unfortunately, it is the very nature of any organization to grow and to attempt to amass more influence, power and control. It is all part of that "grow or die" syndrome that seems to be part of the overall economic picture for so long in this country. In recent years Labor has been overreaching, the natural outgrowth of its very existence, just as business overreaches in acquisition of other businesses and its attempts to dominate its own particular area. Advertising is not meant to tell the public merely that XYZ Company exists and has a product. The squeeze is occurring at lower and upper ends of the employment ladder. We may have more people in the world than can be gainfully employed. I shudder at the implications of all that. Perhaps it is the economic equivalent for humanity of that meteor strike of 65 million years ago.

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