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Unemployment 101

Figures often beguile me, particularly when I have the arranging of them myself; in which case the remark attributed to Disraeli would often apply with justice and force: “There are three kinds of lies: lies, damned lies and statistics.”

Mark Twain

When you see a cheery report like this …

Deceptive job creation statistics

… or like this …

… or like this, what they’re talking about is the official unemployment rate for the United States. Economists identify that particular statistic with the dry title of “U3.”

Persons are classified as unemployed if they do not have a job, have actively looked for work in the prior 4 weeks, and are currently available for work.

U.S. Bureau of Labor Statistics

Unfortunately, that U3 number can be misleading.

Here’s a simplified way to visualize the economy when it’s as close as it ever gets to “full employment.” The best America can typically do is when that U3 number drops to around 5% — five out of every hundred people in the workforce have no jobs. Even when the economy’s booming that statistic never drops to zero because there are inevitably at least a few people who find themselves between jobs. It’s not always the same people, and sometimes they’re between jobs for good reasons (on vacation between jobs, going to school, on sabbatical, just sold their business, etc.), so it’s silly to get upset if the U3 number hovers in the neighborhood of 5%. Also remember that this doesn’t represent the whole population of America; we’re only looking at the workforce. We’re leaving out retirees, the disabled, illegal aliens, children too young to work, and the like.

5% unemployment
5% unemployment

Now let’s say a big recession hits. Ten out of every hundred people of working age find themselves out of work, so unemployment rises to 10%.

10% unemployment
10% unemployment

After a long time passes, the federal government announces that unemployment has dropped to 8%, and the TV talking heads eagerly parrot that latest U3 number. Good news, right?

Not necessarily. True, it could mean that two of every hundred workers went back to work. That’s an easy assumption to make when you hear that happy “news” report:

8% unemployment
8% unemployment

At the other extreme, it could mean that the government designated a large chunk of the working age population (in our example, 37½%) as “discouraged workers” who have left the workforce (see here for a simple definition). Such sleight-of-hand would count eight of every hundred people still in the workforce as “unemployed” according to the definition of that well-known U3 statistic, but it hides the full story.

8% unemployment (technically)
8% unemployment

Discouraged workers might still be working, but only part time. They might have given up looking for work completely. They might still be “looking for work” in some half-hearted way, but they’ve either been unemployed for so long or haven’t actively looked for work in the past 4 weeks, so the government number-crunchers simply treat them as if they aren’t part of the workforce anymore.

Whatever the mix may be at any given time, those people are still of working age and they’re able-bodied, but they don’t show up in the U3 number reported as the official unemployment rate on the nightly news. This situation would be worse than the nightly news reports would have you believe.

bullshit detectorTo get an accurate picture of how big a chunk of the workforce is actually working, you have to flip things around and consider employment instead of just U3 unemployment and the raw “XXX jobs created this month” announcements.

You have to look at other government statistics like the Employment-Population Ratio (plain language definition here) if you want the whole story.

So the next time you hear a happy jobs report in the news, turn on your B.S. detector and compare our current situation to other recessions and recoveries in American history.

Or at least ask whoever’s sprinkling fistfuls of U3 sunshine to explain this double standard:

Jobless recovery