Understanding the Unemployment Numbers

Every week, we hear so much about the “unemployment rate,” the latest “jobless numbers” and how many “private sector jobs” were added to the overall economy – but what does it all mean?  Is the economy really recovering?  And (most importantly), how will this impact my family?

Let’s start with the basics:

At the beginning of each month, the Bureau of Labor Statistics (a division of the U.S. Department of Labor) releases its “Employment Report” for the previous month.  This monthly Employment Report is based on information provided to the BLS by U.S. employers, and its purpose is to give us a current overall picture of the job market across the country.  The entire monthly report itself usually weighs in at about 40 to 50 pages — chock-full of mind-paralyzing statistics and technical economic data that would send the nerdiest of CPA’s directly to the innermost recesses of his/her liquor cabinet.  At the end of the day, though, the only real “statistic” from the monthly Employment Report that is disseminated by the media (and we hear about) is the “unemployment rate.”  For instance, the current unemployment rate (as of February 4, 2011), according to the BLS, is 9.0%.  So that means, in essence, that as of February 4, 2011, 9.0% of Americans are out of work, right?

Granted, that type of logic would seem, well…logical.  But this is the federal government we’re talking about here, so let’s delve a little bit deeper into this madness, shall we?

The first thing you need to understand about the monthly “unemployment rate” as calculated by the BLS Employment Report is that it only takes into consideration those individuals who are:  (a) out of work; and (b) actively looking for work.  If a person hasn’t worked in the past 12 months and has just given up for the time being and stopped actively looking for a job, the BLS doesn’t count that person as being “unemployed” for the purpose of its monthly survey.  Wait, what?  That’s right — the BLS places those folks into a different category known as “Individuals No Longer in the Labor Force.”  Back to that in a minute…

If you look at the two big headlines that came out of the January Employment Report, you will notice on the top of the first page that the BLS touts the fact that: (a) “[t]he unemployment rate fell by 0.4 percentage points to 9.0 percent in January;” and (b) the American economy added “36,000” new jobs in the past month.  Wow.  That sounds great, doesn’t it?  Lower unemployment.  More jobs.  This would really lead one to believe that the economy is headed in the right direction.  But not so fast…

First of all, let’s look at this figure of 36,000 new jobs in January.  While, granted, positive job growth is better than negative job growth (better to add 36,000 jobs to the economy than to lose 36,000), let’s put this into some perspective.  There are roughly 3,000 individual counties in the United States of America; thus, we can reasonably deduct that about 12 jobs were created in each county in the month of January.  Again, better than losing 12 jobs in every county, but still woefully inadequate to dig the American economy out of its current rut.  Secondly, consider this — America continues to grow.  According to the U.S. Census Bureau, the population of the United States grew over the past decade by 27 million people, an increase of about 10%.  Due to this fact, roughly 125,000 new workers enter the American workforce each and every month.  That’s 125,000 new immigrants and/or young Americans flooding the job market every 30 days!  How great does “36,000 new jobs created” last month sound now?

Now, about those “Individuals No Longer in the Labor Force” — As mentioned previously, the BLS has an entirely different category for individuals who haven’t worked for the past 12 months and have simply “given up” on finding a job at the present time.  These folks are not considered “unemployed” (even though they clearly are).  Thus, they are not even counted by the BLS in arriving at the nation’s monthly unemployment rate.  So if we’re not counting these people who are, indeed, unemployed, how accurate can the unemployment rate actually be?  Well, the BLS has an answer to this question — it’s called their “Alternative Measures of Labor Underutilization” and the picture is not pretty.  When all of these folks are added into the equation, the unemployment rate for January 2011 suddenly spikes from 9.0% to 17.3%, up 0.7% from the previous month.  In fact, in the past few months, some financial experts have estimated that the actual unemployment rate could be as high as 22%.

The bottom line is that the BLS “unemployment rate” quite literally means nothing — zip, zero, nada.  It is based on inaccurate data, incomplete information and faulty assumptions.  In order to glean a more accurate snapshot from month-to-month of America’s unemployment situation, look at the following three pieces of data:

1)  The BLS ‘underemployment rate’ — Again, this figure is released at the end of each month, and it takes into account all persons who are out of work, not just those who are ‘actively seeking’ a job.

2)  Look at the Gallup Polling Organization’s monthly ‘rolling average’ of those Americans who are ‘unemployed’ and ‘underemployed.’  Historically, it has been one of the most accurate indicators of the national unemployment rate.  Gallup’s monthly survey measures the percentage of U.S. adults, aged 18 and older, who are unemployed and/or underemployed.  The results for each 30-day ‘rolling average’ are based on telephone interviews with approximately 30,000 adults, and have a less-than-one-percent “margin of error.”  In case you’re wondering, Gallup’s results for January 2011, placed the ‘unemployment rate’ at 9.8%, and the ‘underemployment rate’ at 18.9%.

3)  Finally (and most importantly), look at the BLS monthly Employment Report to find the actual number of private sector jobs created in the previous month.  For instance, with 125,000 new jobs needed each month just to keep pace with population growth, 36,000 jobs created in January of 2011 is not going to cut it.

To illustrate where we need to be in terms of monthly job creation, let’s use the BLS figure of 9.0% unemployment (even though it’s a bogus number) just for the sake of argument.  In order to lower the unemployment rate from 9.0% back down to the historically acceptable rate of 5.0%, the American economy has to create 250,000 new jobs each and every month for the next 60 consecutive months.  Go back and read that sentence again.  And just remember — last month we only added 36,000 new jobs.  So…is the American economy really in recovery?  You be the judge.

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