United States | March 16, 2013 at 10:17 pm

The Failures of the Unemployment Rate

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1024px-FEMA_-_29783_-_Workers_unemployed_by_the_freeze_in_CaliforniaUnemployment rate. The catch-all political stock phrase on the state of the economy. A single metric which, when blown out of proportion, is inherently distortionary.

The Bureau of Labor and Statistics defines the unemployment rate as the total number of unemployed as a fraction of the civilian labor force. How one defines ‘unemployed,” however, completely changes the statistic. In fact, the BLS releases six unemployment statistics a month — ranging from U1, which uses the most stringent definition of unemployed, to U6, where a larger swath of the population falls under the ‘unemployed’ header. The range between the two is typically in the double-digits; in February, it was 10.1 percent.

BLS statistics indicate the trends the executive branch harps on in every press release. Over the past year, unemployment is down a point in almost every category. Although we are still experiencing a historically slow recovery from the recession, it has been steady, if nothing else. Yet, looking closely at metrics besides the unemployment rate tells a much larger economic story.

The hazy definition of ‘unemployed’ makes unemployment a deceiving statistic. In most cases, unemployment is defined as those still looking for labor — another ambiguous title usually assigned to those receiving unemployment benefits and filing job petitions. The rate does not cover, however, myriad other factors. An underemployed laborer will not be covered in the unemployment rate; part-time workers are only covered in U-5 and U-6. To workers struggling to pay the bills, part-time and full-time employment are defined very differently. For the purposes of the unemployment rate, they are the same.

The problems with this metric are immense. If a series of people stop receiving benefits and fall out of the labor force, the unemployed and labor force drop by the same amount. It takes only simple arithmetic to realize the drop in the individuals looking for labor will lower the unemployment rate — giving political leadership ammunition to use against their opposition, preaching a recovery that does not exist.

Press releases by the BLS are frequently misinterpreted by the media. Cherry-picking the unemployment rate sells headlines, but misinterprets the story at hand. For all the jobs the economy has gained in the past year — 1.8 million according to CBS — the civilian labor force has increased by less than 700,000 individuals. The labor force participation rate, the percentage of the adult working population out of the total adult population, has actually dropped by nearly half a percent. For all the talk about a drop in unemployment, the raw numbers indicate the number of adults not in the labor force (an increase in 2,000,000 since last February) has increased by nearly three times as much as the change in the unemployed (dropping by 800,000).

The news is not all bad, however. Another factor not measured in the unemployment rate is length of unemployment, and the shift over the past year has been away from long-term unemployment towards short-term employment. Short-term employment, typically frictional unemployment from when people change jobs, is less hazardous than long-term unemployment. The number of individuals unemployed for more than 27 weeks has dropped by more than 500,000, with a similar drop in those unemployed for 15 to 26 weeks. Although the number of people unemployed has increased by 100,000, it does not offset the net benefit accorded to the economy.

The larger lesson from the classic unemployment press release is the insufficient nature of the unemployment statistic. Former governor Mitt Romney noted this during the presidential debates, pointing out that President Obama’s cited unemployment statistics rarely measured real changes in labor in the economy. Nevertheless, in addition to its vague definition of unemployment, the unemployment rate fails to measure the current state of unemployed workers. The number of weeks they have been unemployed, as well as the change in pay for part-time employees in the recession, are both key factors in measuring the health of the economy.

With the supposed growth of Big Data, the government must revise the way it evaluates the economy. Metrics like unemployment rate and labor participation rate illustrate individual segments of the economy, but none give a full picture. Distinctions between part-time and full-time labor, as well as those between employment and underemployment, are key for public policy. A proper way to define ‘looking for a job’ will not only reduce bureaucratic inertia in distributing unemployment benefits but will give policymakers realistic data on which to make regulation decisions. Much like nominal tax estimates — namely, those based on pre-tax income — rarely reflect tax payments, such statistics give a false picture of fiscal health.

Growth in this area is achievable; paths of research to regionally define unemployment and identify concentrated centers that produce self-perpetuating poverty cycles could become invaluable. More accessible data has completely changed, among others, weather forecasting, baseball analytics, stock trading, and even how we take stock of political races, courtesy of Nate Silver. The time is ripe to apply that insight to our nation’s most pressing concern: its economic health.

Image Credit: Wikimedia Commons

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