What is the real unemployment rate?

What is the real unemployment rate?

As good as the administration says the economy is performing, most of us simply don’t feel it.

WASHINGTON, February 11, 2015 The federal government just released figures indicating that the unemployment rate in January, was 5.7%. Although the economy added about 250,000 jobs, the rate is a bit higher than the previous month.

Does this number really tell us about the current state of the US economy?

The 5.7% figure looks very good. Historically, but prior to the early 2000’s, economists believed that if the unemployment rate was under 6%, the economy was operating at a “full employment level.” But then unemployment rate fell to less than 6%, then less than 5% and then, for a month, under 4%. This was all accomplished during the Bush Administration.

With a rate that low economists essentially abandoned talk of a 6% full employment level. Additionally, the relatively strong economy under Bush produced mostly full-time jobs with employees working, and earning wages, for a 40 hour work week.

While wages in the declining manufacturing sector failed to keep up with inflation, total incomes were rising, especially for workers in the service sector of the economy, where unemployment rates were even lower than the national average.

What, exactly, does the unemployment rate mean? Is it a good indicator of the state of the economy?

Instinctively, most Americans would agree that the unemployment rate is a good indicator of the economic health of a nation.  The more people that are working and contributing to the economy, the more output we get, the more the economy can grow and generally the higher the standard of living. It is critical that the government provide an accurate number for the unemployment rate so Americans can make an objective assessment of economic activity.

This is more difficult that it may seem. The official unemployment rate is measured by adding up all people who are actively seeking jobs but cannot find one, divided by the total labor force. The labor force is everybody who is working plus those actively seeking jobs.

The problem is that it excludes people who could be working but because they have lost their job and have been searching in vain for another, they have given up looking. These discouraged workers are not counted as unemployed.

In addition an individual is counted as employed even if she is working only a few hours per week. Because the Affordable Care Act now calls full-time employment as anyone working 30 or more hours per week, employers, especially in unskilled or low skilled jobs, have been reducing a worker’s hours to under 30.  So while these people are counted as employed, they are not a full-time employee working the traditional 40 hours.

When we add these under-employed workers and the discouraged workers the unemployment rate is much higher. The Bureau of Labor Statistics calculates something they call the U6. This figure includes those items that are absent from the official unemployment rate. In 2007, prior to the start of the Great Recession, the U6 was 8%. In 2010 this rate peaked at 17%. Last month this rate was just over 11%, clearly indicating we continue to have an unemployment problem.

The situation is made worse when we look at another key statistic: the labor force participation rate. This measures the percent of the adult population that is working or actively seeking work.  Prior to the recession, this number was about 67%. It is now under 63%, meaning almost 6 million adults who traditionally would be contributing to economic activity are no longer working or seeking work. This is perhaps the most disturbing number.

The facts are that we are currently just slightly above pre-recession levels for the number of people working.  There is, however, a disproportionately large number of part-time workers rather than full-time workers. There is a disproportionately large number of people working who are not fully documented. There is a disproportionately low number of American adults in the labor force.

It is no wonder why the economy grew at less than 2.5% last year and in fact has not exceeded 2.5% since prior to the great recession. And it is no wonder that as good as the administration says the economy is performing most of us simply don’t feel it.

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