Monday, September 5, 2016

The Unemployment Rate Is Misleading

Since it's Labor Day it's appropriate to post something about jobs and unemployment.

Politicians like to boast when the unemployment rate is down, and on the surface a lower unemployment rate (called the U3) is good news, but not necessarily. What the politicos and their media fanboys often leave out is something called the labor participation rate. When this is also down the unemployment numbers look deceptively good.

That may sound confusing so I recommend this short video to help you understand why the unemployment rate is a meaningless number unless placed in the context of the labor participation rate:
To recap, if ten out of a hundred able-bodied adults are unemployed and looking for work the unemployment rate is 10%. If five of those just drop out and stop looking that means that there are now only five people unemployed and still looking for work. The unemployment rate is now 5% but there are no more people working than there were before. The unemployment rate has been cut in half but the actual job situation in the country has gotten worse, not better, since some people have given up even trying to find a job.

The actual unemployment rate, called the U6, factors in all those who are unemployed or underemployed.

The official unemployment rate in August, the U3, was 4.9%, but if the labor participation rate is factored in the U6 was 9.7%. The U6 is a better indicator of the employment situation in the country, but the U3 is the one we usually hear about.

There's a helpful interactive graph here which shows how the U3 and U6 have varied over the last couple of decades.

One thing that should be kept in mind is that not all of the drop in the labor participation rate is due to a weak economy. Some of it is due to large numbers of baby boomers taking early retirements.

At any rate, remember the next time the media gives the impression that the economy is getting better because unemployment is down that there's more to the story that they may be leaving out.