Undoubtedly you have heard the optimistic economic outlooks on mainstream media channels. Often along with those highly touted future outlooks is a justification that the United States is at “full employment”, given that the unemployment rate, as recorded by the Bureau of Labor Statistics (BLS), is reported to be 4.8% as of January 2017. What does that mean and is it accurate? I will break down this statistic to better show you how to interpret this number.
How Unemployment Is Calculated
The Bureau of Labor Statistics conducts monthly surveys to approximate what the employment/unemployment rate is for the United States. But, despite advances in modern technology, and the availability to contact people using various different means, it might be a little surprising to find out exactly how this statistic is calculated: BLS does it the old fashioned way, they make telephone calls. Yes, by phone (who talks on the phone anymore?). While that in itself doesn’t discredit the surveys, it certainly limits the scope of people willing to participate in the survey.
The Bureau makes some 60,000 phone calls every month and asks a few simple questions of the person on the other end of the the phone. The phone call, in theory, should be entirely random and spread out over the entire United States.
Unemployed Are Excluded From The Unemployment Rate…
The first thing that is determined when those phone calls are made is what demographic the individual is in. By demographic, the determination is if you are someone who is of working age, or not. Children, university students and elderly are excluded. Also, upper management and business owners are excluded. But, if you are not in that specific class, then you are in what is determined to be the “Labor Force,” the portion of the population that is eligible to work.
Afterwards it is determined whether the individual is in the labor force, the question is whether or not that person is employed, under-unemployed, unemployed or discouraged. If you are working, you are considered employed. If you are working but are working part-time and would rather have full-time employment then you are under-employed. And, if you are not working you are unemployed. If you have not worked for a given period of time, nine months, then you are discouraged and are no longer counted in the labor force.
The “Unemployment Rate”
Here is a chart of the unemployment rate in the United States, via Macro Trend:
Currently, the unemployment rate is 4.8%. The rate of those that are working part-time but would like to work full-time adds another full 1%, or, 5.8%. The U6 rate of unemployment, or discouraged workers adds another full 3.6% more to the unemployment rate for a total of 9.4%, as the chart above shows.
The headline number, those that are in the employment age that are working or transitioning to another job is what you are going to hear in the headlines, the 4.8%. That number is accurate. However, it does not show the entire picture. Knowing all the variables involved will better assist someone in hearing employment statistics.
Labor Force Participation Rate
The labor force participation rate is a different calculation, not associated with the unemployment rate. The participation rate is an important number, yet is never mentioned by media outlets, nor scrutinized. This number is a more accurate determination of the true unemployment rate as it looks at the total adult population that is eligible for employment and determines if you are working or not, regardless of your status of discouraged or under-employed. The main determination is whether you are working or not working – pretty simple right? Additionally, there are no surveys involved, so no room for bias and significant data variances overtime.
The difference in reviewing the “participation rate” versus the highly touted “unemployment rate” is that the participation rate does not discriminate nor skew the employment numbers. It simply looks at who is working, and who isn’t. Therefore all of those “discouraged workers” who are eligible to work, but are not working are considered unemployed by the “participation rate” – which is something you’d expect, right? If you aren’t earning a paycheck you are unemployed, whether you like it or not. Yet the “unemployment rate” considers “discouraged workers” as employed, which does not make too much sense.
There are 320 million Americans. Of that, approximately 255 million are eligible for the labor force. This, of course, is where being six years old and not carrying your weight around the house comes in to play – in that children are excluded from the calculation. Additionally military personnel and those institutionalized are also automatically excluded. The rest, all adults, including your very old and frail grandmother, would be considered able to participate in the labor force. The elderly employment participation rate is an important topic to review in another article, but the amount of elderly that have not retired has significantly increased since the 1990s, a worrying trend.
The participation rate of those individuals working to the total number eligible in the labor force is currently 62.9%. That means 160 million Americans are currently working. This also means that 37% are not working.
True Unemployment Rate
Consistency in methodology employed to collect data is critical to examine. If you are going to follow a statistic it is best to know if the statistic is consistent over a period of time. Keep in mind that methodology for collecting statistics often times changes, some of it justified, some not. Therefore, simply looking at the headline number may not provide you with an accurate insight into the true status of the unemployment picture in the United States.
As such, of the two statistics for measuring the unemployment rate in the United States being the “unemployment rate” and the “participation rate”, the “participation rate” provides a much clearer picture both for today and historically into understanding the status of employment. There are no multi layered statuses of unemployment such that the “unemployment rate” has. It is a very simple statistic that does not need to be augmented when you view it.
All statistics can be easily manufactured to suggest whatever is on the agenda of those displaying this information. The next time you hear or read a statistic make sure to evaluate it closely to understand it in context, otherwise it is impossible to determine if it is good, bad or insignificant. As long as you use data that is contextually consistent in how it is derived you can be consistent in your determination.