Surprising:Why Unemployment Is 6.30% Higher Than We're Told!

It’s been said that it takes a village to raise a child. It could also be said that it takes an expanding labor force and good paying jobs to sustain a growing economy. Since the crisis in 2008, there has been a great deal of banter surrounding the rate of unemployment in America. Many suggest the real rate is actually much higher than the rate reported each month. In this article, we’ll break it down into bite-size, easily digestible morsels, and reveal the true story on the real unemployment rate.

Unemployment: An Incomplete Picture?

The unemployment rate is an indication of the strength of the labor market. Many believe the employment situation exhibits more influence on the U.S. stock market than any other single metric. In short, it reflects the condition of the American worker who is the backbone of this great nation. When there are plenty of good-paying jobs and when fewer people are out of work, the economic picture is bright. Conversely, when jobs are scarce or when the jobs available are low-paying, menial positions, the opposite is true.
The unemployment rate measures the percentage of people who are out of work. However, to be counted as unemployed, you must meet the following three conditions:
1) You do not have a job;
2) You have actively looked for a job in the past four weeks; and
3) You are currently available for work.
Numbers one and three are self explanatory. Number two is really the key. According to the standard unemployment measure, if you did not look for a job within the past four weeks (assuming you meet the other criteria), you are not considered unemployed. This is the criteria for the “official” unemployment rate published each month, which is also known as U-3.

Since there’s a U-3, it stands to reason that there must be other “Us.” In fact, there are six (U-1 through U-6). We’ll dispense with the entire discussion and focus on the most comprehensive measure of unemployment which is U-6.

U-6: The Real Unemployment Rate
U-6 is the most comprehensive measure of unemployment. It encompasses U-1 through U-5 (again, U-3 is the official measure) and is defined as follows:

U-6 is the TOTAL unemployed, plus all marginally attached workers, plus total employed part time for economic reasons (PTER), as a percent of the civilian labor force.

What’s a marginally attached worker? What’s part time for economic reasons? First, a marginally attached worker is one who didn’t look for a job during the prior four weeks, but did look for a job within the past 12 months. In short, these are people who want to work, are available to work, but are discouraged. In the official unemployment rate (U-3), they are excluded. Second, a person working part time for economic reasons is one who is working less than 35 hours a week but wants to work full time. They may have had their hours cut from full time to part time status. They may even be working as little as one hour a week. In other words, these are workers who are working part time for economic reasons (i.e. they need the money). These are the key differences between the “official” unemployment rate (U-3) and the more comprehensive measure (U-6).
Are U-3 and U-6 Much Different?
The unemployment rate as measured by U-3 is much lower than the more comprehensive U-6. The following chart contains the unemployment rate for both U-3 and U-6 from January 1994 to January 2015. As you can see, U-6 is much higher. This is because U-6 is counting everyone who is out of work, not just those who looked for a job during the four week period prior to the official unemployment release. There is another issue which affects both measures. Let’s look at it now.

The Shrinking Labor Force
As mentioned, to calculate the unemployment rate, we need to know two things: How many individuals are employed and the total number who are seeking employment. The total of both comprises the Labor Force Participation Rate. To explain how to calculate the unemployment rate, let’s consider a simple example. Let’s assume we have a town with a total “potential” workforce of 100 individuals. If 10 of the 100 were out of work, the unemployment rate would be 10% (10 / 100 = 10%). However, if 5 of the 10 became discouraged and didn’t look for a job in the previous four weeks, the total labor force would be reduced to 95. This would cause unemployment to fall to 5.26%. In reality, the unemployment situation would not be any better than it was. To better understand this, here’s how the unemployment rate is calculated.

(Total Unemployed / Total Labor Force) x 100

In our example, it would look like this:

(5/95) x 100 = 5.26%

The following chart shows how the U.S. Labor Force Participation Rate has declined since peaking in March 2000. In fact, the current rate is the lowest it’s been since March 1978. Simply put, this means there are fewer people looking for work these days. If the Labor Force Participation Rate was the same today as it was in March 2000, the “official” unemployment rate (U-3) would be closer to 9.0% than the 5.7% reported for January. This would also cause the more comprehensive U-6 rate to rise.



Conclusion
In this article, we learned how the unemployment rate is calculated and examined the difference between the official rate (U-3) and the more comprehensive measure (U-6). We also discussed the Labor Force Participation Rate and revealed how it has steadily declined since peaking in March 2000. Before the U.S. can experience strong economic growth – the type of growth we had in the 1980s and 1990s – the U.S. labor force will need to expand. Of course, as technology plays a more prominent role, the need for individual workers will decrease, but that’s a subject for another time. What must happen before the labor force can grow? First, we need a less intrusive government which will allow for a revival of the American entrepreneurial spirit. Second, workers will need to adapt and learn new skills as the country continues to evolve and embrace new technologies. Finally, we need to stimulate consumer demand which is responsible for approximately 70% of total GDP. Actually, this last item is the most important because if consumers don’t knock on the door, pick up the phone, or otherwise increase their level of spending, the first two items will have little effect.

Unfortunately, this issue – like many others – has become more fodder for political demagoguery than substantive discussion. Unless our leaders begin to act like a fiduciary and make decisions which are in the best interest of the country, I suspect very little will change. As I write, I am reminded of J.F.K.’s famous words from his inaugural address in 1961, “Ask not what your country can do for you, ask what you can do for your country.” I am hopeful that we will elect leaders who will disregard personal gain for the good of this great nation. If we do this, American exceptionalism can take root and we will once again become the shining light on the global economic hill. Remember, if it’s good for Americans, it’s good for America.