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Why 95% of Traders Fail

Unemployment Rate: What Is The Real Story?

Economics / US Economy May 18, 2008 - 11:40 AM GMT

By: Ronald_R_Cooke

Economics Best Financial Markets Analysis ArticleIf you have been reading my essays, you know I firmly believe the United States Department of Labor (DOL), Bureau Of Labor Statistics (BLS) understates the rate of inflation (see: CPI: Sophisticated Economic Theory, Terrible Ethics). You also know that a low Rate Of Inflation means that the Department of Commerce (DOC), Bureau Of Economic Analysis (BEA) overstates “Real” Gross Domestic product (see: “American GDP: Can We Trust The BEA Data?” and: “Yes Virginia. This Is A Recession.”).


This raises a question. If there are structural problems with the credibility of our government's reports on the Consumer Price Index and Gross Domestic Product, can we trust the BLS report on Unemployment?

Yes and Maybe.

The BLS reported on May 2, 2008: “ Nonfarm payroll employment was little changed in April (-20,000), following job losses that totaled 240,000 in the first 3 months of the year, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. The unemployment rate, at 5.0 percent, also was little changed in April. Employment continued to decline in construction, manufacturing, and retail trade, while jobs were added in health care and in professional and technical services.

Frankly, a 5% unemployment rate lacks statistical credibility and certainly fails to document the pain of America's unemployed. Let's take a closer look at the BLS data:

  • Since its peak in September 2006, construction employment has fallen by 457,000.
  • Over the past 12 months, manufacturing employment has declined by 326,000.
  • Since its peak in March 2007, the retail trade industry has shed 137,000 jobs.
  • The health care industry has added 365,000 jobs over the past 12 months.
  • Professional and technical services employment rose by 27,000 in April after showing little change during the first quarter of 2008.
  • Since October 2007, food services employment growth has declined to an average of 13,000 jobs per month; this compares to an average increase of 28,000 jobs per month for the preceding 12-month period.
  • Total unemployment increased by 11.6% from 6,532,000 persons in April of 2007 to 7,287,000 persons in April of 2008.
  • The number of people who lost their job, or were no longer holding a temporary job, increased by 21.0% from April 2007 to April 2008.
  • The number of people who were told they had permanently lost their job increased by 30.1% during this same period.
  • From Q1 2006 to Q1 2008, the number of Layoff events has increased by 45.3%. They increased by 20.6% from Q1 2007 to Q1 2008. There has been a continuing increase in the number of layoff events, and the number of Total Initial Claimants, since August of 2007.

Despite these data points from the BLS report, the BLS claims the Unemployment Rate has increased from only 4.30% in April 2007, to a negligible 4.76% in April of 2008. Does this create a credibility problem?

Let's look at the BLS definition of “Employed” and ”Unemployed”:

“People are classified as employed if they did any work at all as paid employees during the reference week; worked in their own business, profession, or on their own farm; or worked without pay at least 15 hours in a family business or farm. People are also counted as employed if they were temporarily absent from their jobs because of illness, bad weather, vacation, labor-management disputes, or personal reasons.

People are classified as unemployed if they meet all of the following criteria: They had no employment during the reference week; they were available for work at that time; and they made specific efforts to find employment sometime during the 4-week period ending with the reference week. Persons laid off from a job and expecting recall need not be looking for work to be counted as unemployed. The unemployment data derived from the household survey in no way depend upon the eligibility for or receipt of unemployment insurance benefits.”

Statistically speaking, these are narrow definitions. And that is OK. But we must be aware they also create a structural downward bias in the reported Rate Of Unemployment. That means a low Rate Of Unemployment may not reflect what is happening in the “real” world.

So what else does the BLS data tell us about unemployment?

If we examine Table A-12 Alternative measures of labor underutilization, we find this little jewel: “U-6 Total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all marginally attached workers (not seasonally adjusted) was 7.9% in April of 2007 and 8.9% in April of 2008.

To quote the BLS: “Marginally attached workers are persons who currently are neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime in the recent past. Discouraged workers, a subset of the marginally attached, have given a job-market related reason for not looking currently for a job. Persons employed part time for economic reasons are those who want and are available for full-time work but have had to settle for a part-time schedule.”

And from the “Persons Not in the Labor Force” (Household Survey Data) page: “About 1.4 million persons (not seasonally adjusted) were marginally attached to the labor force in April. These individuals wanted and were available for work and had looked for a job sometime in the prior 12 months. They were not counted as unemployed because they had not searched for work in the 4 weeks pre-ceding the survey . Among the marginally attached, there were 412,000 discouraged workers in April, about the same as a year earlier. Discouraged workers were not currently looking for work specifically because they believed no jobs were available for them. The other 1.0 million persons classified as marginally attached to the labor force in April cited reasons such as school attendance or family responsibilities.” (Emphasis is mine. Ron)

So. If we examine the BLS data and add up the number of self employed persons who are not working, the number of persons who are working part time because they can not find a permanent full time job, and the number of persons the BLS classifies as unemployed, the total number of people who are either unemployed or underemployed equals 12,395,000 workers.

If we are willing to accept this broader definition of unemployment pain,

then the “real” rate of unemployment is 8.1%.


Conclusion

It would appear an 8.1% rate of unemployment (or underemployment) is far more consistent with the information we have heard or seen in the media, and certainly more sensitive to the economic pain of this recession. It should not be a surprise if this figure exceeds 12% before this business cycle is over. Not only will the ranks of the unemployed increase, but there will also be a sharp increase in the number of persons who are discouraged because they can not find work, or are working in part time jobs because they can not find permanent employment. All three conditions are detrimental to the economy, the community, the security of the family, and the self worth of the individual. They also promise to strain the viability of our political institutions.

And that's the real story on unemployment.

Ronald R. Cooke
The Cultural Economist
Author:  Detensive Nation
www.tce.name

Cultural economics is the study of how we interact with economic events and conditions. Culture, in this sense, includes our political systems, religious beliefs, psychology, history, customs, arts, sciences, and education. The term "Economics" refers to the extent and process of how we employ capital, labor and materials. If human existence is dynamic, then economics – as a science – must be able to characterize the interaction of culture and economics in contemporaneous terms.

Ronald R Cooke Archive

© 2005-2016 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

roobah
06 Oct 08, 23:07
working or unemployed ?

Just because someones' benefits expire, does not mean they are working or unemployed.

With this in consideration, the number is as high now as it was during the depression.


recycle
09 Oct 08, 15:54
Unemployment Clarification

Can you clarify this quote?

"Despite these data points from the BLS report, the BLS claims the Unemployment Rate has increased from only 4.30% in April 2007, to a negligible 4.76% in April of 2008. Does this create a credibility problem?"

By your own numbers:

"Total unemployment increased by 11.6% from 6,532,000 persons in April of 2007 to 7,287,000 persons in April of 2008."

The BLS appears to be right.


Mark M.
12 Oct 08, 00:08
umemployment

I do not believe the unemployment records the goverment gives us.They say its only 6%,I believe its about 24%.They do not count people who run out of the benfits given.Our counrty is driven by a housing market.I dont think the realitors or goverment want you to know the real numbers of losses in the housing market.We make nothing in any kind of numbers.The number one export is recycibles,copper,steel scrap ect.,all sent to China.Lets get real,we have no econmy to build on.A deppression,which is already here,will take 5 to ten years,maybe longer.We have no real savings,we are in real trouble my friends.Gods Speed


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