Thursday, December 5, 2013

Four Myths Surrounding the Unemployment Rate

Mark Knold, Supervising Economist

I work and report upon the unemployment rate here in Utah and can attest through feedback and public comments that the unemployment rate can be a misunderstood statistic. There are several myths I have viewed that surround the public’s perception of the unemployment rate.

First some basics. Every month, the federal government conducts duel economic surveys; one of households and one of employers. The intent is to measure the overall level, nuances, and changes within the economy. What better way than to go straight to the horse’s mouth? The unemployment statistics come through a household survey—60,000 nationwide including 600 in Utah. The estimate of job growth comes from a business survey—145,000 nationwide and 3,700 in Utah (but that’s another blog for another day). The focus here will be on the household survey.

The unemployment rate is a popular economic statistic, probably cited more by the media and other casual economy watchers than any other economic variable. Small movements in the unemployment rate can be presented as major economic shifts. But is that really the case?

1. It is the percentage of people in the economy without a job. The unemployment rate is not the percentage of people without a job. It is only the percentage of people who do not have a job and are currently looking for a job. That “looking for a job” is a key caveat—and then, it is only those 16 years of age and older. Not everyone 16 and over is working or wants to work, so they are not part of the labor force. The official U.S. Bureau of Labor Statistics (BLS) definition of unemployed, as calculated in the unemployment rate is: 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. Persons who were not working and were waiting to be recalled to a job from which they had been temporarily laid off are also included as unemployed.

2. The unemployment rate comes from the number of people filing for unemployment insurance benefits. That is another common myth. The BLS definition continues: Receiving benefits from the Unemployment Insurance (UI) program has no bearing on whether a person is classified as unemployed. 

The unemployment rate is so much more than those who file for unemployment benefits. Unemployment benefits are largely only for those who have been recently laid off. In Utah, about one-quarter of the unemployed actually qualify for unemployment benefits. Eligibility is based on recent work history. Young people entering the labor force for the first time are unemployed but have no work history. Re-entrants to the labor force after some time away also do not have eligible work history. Others ineligible are most who were fired from a job along with those who quit a job. To include these peoples in the unemployment rate is why a survey of households is needed, not just the unemployment benefit count.

3. The unemployment rate is falling, therefore the economy is getting better. In most cases this is true, but the recent Great Recession exposed a rare time it is not. The rate is only as good as the number of people looking for work. If more unemployed people stop looking for work (and therefore fall out of the unemployment rate) than the number of new people losing jobs and joining the unemployed ranks, then the unemployment rate will actually fall as the economy continues to weaken. This phenomenon is rare, and in the post-World War II environment has only been observed during the Great Recession. When Utah’s unemployment rate fell from its recession high of 8.4 percent (late 2009) to around 5.4 percent by early 2013, it was falling due to fewer and fewer idle laborers looking for work. Throughout 2013, the rate has continued to come down, but now it has shifted over to more people getting jobs and coming off the unemployed ranks than those giving up on finding work.

4. Job growth was up 3% but the unemployment rate went up; how can this be? Counter movements like these occur frequently, especially within survey-based statistics where a degree of +/-wiggle room is accepted. Most of the time the unemployment movement is just one or two percentage points—such as 4.6% to 4.8%—but that often gets media attention as a real and significant change. In reality it is nothing more than survey wiggle room. For each state, BLS needs to see the unemployment rate move at least 0.3 percentage points before you cross from the realm of accepted survey leeway into the possibility that something is actually changing within the economy. In slang parlance, going from 4.6% to 4.8% is survey decimal dust. But it doesn’t play that insignificantly in the general perception. Instead, it is usually perceived as a significant change in the economy.

As you can see, the unemployment rate is probably not the best economic variable to gauge the economic environment. A better measure would be to count the employed over in the business survey. Many economists prefer that method. There is less gray area over who should count as employed versus who is unemployed, and less chance that adverse news masquerades as good news (and vice versa).