A Philosophical Look at Unemployment

Regular reader Buddy Rojek brought this response he received from the Bureau of Labor Statistics to my attention:

Mr. Rojek –

It is correct to note that the official unemployment rate, currently at 8.3 percent, does not include persons who have stopped looking for work.  In order to be classified as unemployed, a person must have conducted active search in the last 4 weeks.

It is not correct, and indeed misleading,  to suggest that the Bureau of Labor Statistics is “hiding” anything about this.  The Bureau publishes information every month on the number of persons who have not looked for work because they are discouraged about their job prospects.  The official report on the labor market, the Employment Situation, includes a section in the text discussion every month documenting the number of such persons.  The Bureau also includes a table of “alternative indicators”, which show additional measures based on broader definitions of underemployment, including things such as part time work for economic reasons or persons who have stopped looking for work.

What I am looking for here is a definition of unemployment. There are many measures. Which (or which combination of measures) is the best? Which gives us the fullest picture of the economic situation? The answer is that to get the fullest and richest detail, we must look at as much data as possible. It is foolish to expect — as the BLS does — that the detail of unemployment can be fully conveyed in one particular figure, or data series.

The real question, I suppose, is what we want to get out of our unemployment statistics? Do we want to learn about the wider economy, or do we want to restrict our investigation to labour markets?

To an outsider, the notion that the unemployment rate does not include discouraged workers, who have given up looking for work, is rather jaw-dropping. And yes — it does smack of an attempt to brush problems under the rug.

But examining the data, it becomes clear that the difference between the official unemployment rate (U3 — below in blue) and one that adds in discouraged workers (U4 — below in green)  is very small. The big difference comes when we include part-time workers who cannot find a full-time job (the “underemployed”) (U6 — below in red):

While there has been a minor improvement in both U3 and U4 since the recession officially ended in 2009, U6 has remained stubbornly elevated at over 15% of the population. Does that suggest that the official figures are sweeping a problem under the rug? Yes — the official numbers are capturing nothing like the real extent of our economic malaise.

More interesting is the civilian-population employment ratio:

This is the broadest measure of all, measuring the number of people with jobs against the total civilian adult population. During the recession, that figure fell off a cliff, and there has been no recovery at all. Now — the fact that 41%of adults are workless — is not necessarily quite as shocking as it seems. Many of these are homemakers, or retired, or disabled; certainly it is true that in every society on Earth there are a residual group of people who will not belong in the working population. The salient information here, then, is that total employment has slumped by 5% of the population since its peak, and that even with all the quantitative easing and stimulus there are no signs of any recovery.

In the end, the choice of data set can be irrelevant. In this recession, a lot of the data has been so objectively bad that the data set makes no difference at all. This one chart running from U3 data — where there has been a minor improvement since the end of the recession — says more than any other I have found:

37 thoughts on “A Philosophical Look at Unemployment

  1. Good work Buddy! Next time, can you ask the BLS how they measure inflation.

    Or more accurately, give me their equations and allow me to crush their methodology.

    When you under report something by a couple % every year, the compound function of those mistakes really adds up!

    When the SHTF and everyone is running around buying beans and bullets, I won’t be one of those folks! I will head over to the BLS office and I’m going to catch a couple of those liars trying to sneak out the bathroom window. No death threats, no physical harm, just doing a little citizens arrest.

    You see, thats the thing about lying. The longer you lie, the more trouble you get in. (I learned this when I was 4 years-old)

    • Thanks Fo Sho. And thank you John for your great response and research. That last graph rams it home, hits it for a 6, smashes it out of the ball park. It should be a bumper sticker. “Hopium: Are where there yet!”

  2. What I normally do as a rule of thumb is to just double the CPI & Unemployment lie-ratios..
    Not that this stop Fed and Gov to base policy decisions on this ridiculous measures..

  3. And to add… The Shit will never ‘hit’ the fan. Rather, the fan will gradually accumulate shit until the motor burns out and it just slowly stops spinning. The folks waiting for a ‘moment of truth’ or ‘hard reset’ are just as high on the crackpipe as the people who think everything is going to be great. It took about 200 years for Rome to fall, and if you were a casual observer during that period, you would live your entire life just seeing a slow, grinding decline. It never really ‘broke’ suddenly. That’s what’s ahead for us, unfortunately. I’m pretty well resigned to just managing my life so I can die comfortably.

    Joseph Tainter should be required reading for every human being on this planet.

    If people really wanted to see a Renaissance, they’d focus their attention on opening the next frontier… Which would be a valve for for the risk-takers and dreamers to excape through. At risk of being ridiculed, that would be Mars. It the ‘North America’ of the 21st Century. Who’s assembling the fleet?

    • While I feel like you & I are coming from the same place, I don’t agree the next frontier is Mars. This is for simple reasons of (I guess the correct word is) astrogeography. When planets form, the heavier metals go to the centre. Furthermore, most of Mars’ water seems to have either gone underground or evaporated.

      Asteroids are homogeneous (i.e. the heavy stuff has not sunk to the core) repositories of everything — industrial metals, precious metals, water and even hydrocarbons. I feel the next frontier is near-Earth asteroids. In fact, it is one of my dreams to open that frontier, or at least to convince those with the means to do so to do it.

      • Aziz,

        Outstanding! No problem – I’d be willing to shift focus to the minor bodies; And you’re absolutely correct on the mineral extraction considerations. That said, we still need folks to LIVE off of Earth, and set up a new, independent society. We really need a planet for that aspect.

        Still – glad to see we’re in general agreement on the ‘next frontier’. Thanks for not ridiculing – made my day, brother!!

        • That said, we still need folks to LIVE off of Earth, and set up a new, independent society.

          Yes, this is absolutely critical. A one-world society can be wiped out in one cataclysm. A two-world or three-world society cannot be. The ISS is not enough.

        • It is a race between bacteria and humans to spread the genetic code. One huge asteroid and galactic dust will be the next transport out of Earth.

          Humans 0

          Bacteria 1

        • Interestingly, in a long view, human beings might be considered a vessel for the Earth’s bacteria, fungi and viruses to get off the Earth and get into space.

        • The next frontier is Africa. I would be willing to sponsor a Libertarian NGO. Free economics education for all. Perils of Communism explained.

    • The shit hit the fan in 2008. Its just taking a while to reach us.

      By the by, real estate prices in CA are still dropping. A casual drive around where a live reveals more “For Sale” signs then I have ever seen in my life. And in CA, that is saying something.

      • Yeah, a lot of my family live in California. Let’s just say I remember a lot of people believing that real estate prices at the time of, say, the dotcom bubble were going to go up forever. The demographics at the time, suggested no such thing of course. Even I, a fourteen year old kid, was suspicious of such matters.

        • I have had much interaction with the youth of America in last 3 years (10-20 years olds.) They are the one thing I can point to as positive sign for the future.

        • Everything’s screwed up for my generation. We don’t deserve it. We’re the ones supporting Ron Paul, reading the constitution, believing in limited government, and capitalism, and limited credit creation and all of these things that were normal a few generations back but now earn you a label of “fringe libertarian”.

        • One thing I can say for the Millenials – They’re almost always polite and considerate to us GenXer’s. I like that a lot. What they lack in know-how, they definitely make up for in Likeability. The know-how will come along, probably (hopefuly).

    • Not sure if your continuous grinding decline hypothesis is entirely correct. I’ve heard the opposite for example in the case of Rome (and most anything else; Hemingway’s quote comes to mind [paraphrased] “slowly and then all of a sudden”): yes, there was a slow grinding decline both before and after “moment X” but that “moment X” precipitated things quite suddenly. I don’t have the time to elaborate.

  4. We’ll call you the “Janitor Generation.” Cleaning up the mess of others.

    Because I have other interests besides economics (really), I read other stuff, such as wine blogs. I read a quote the other day that has had me thinking about it ever since. Here is an exerpt:

    WBG: How has your family stayed in the wine business for 700 years?

    Frescobaldi: We’ve been respectful of the next generations. One thing about the heritage, you have to think about the transfer from the previous generation that didn’t blow up everything and did something good for the business as well.
    You have to keep investing always. The company is the most important thing. Be modest. We don’t own boats, airplanes or Ferraris, but we do own 2500 hectares of vineyards. The main focus is to have a healthy company.


    • As one of the longest standing visitors, I think you might already have some idea of what I might say. Nonetheless, vague prognostication would do no harm if I wanted another guest post on Zero Hedge…

      • I don’t think Bill Bonner’s predictions are too vague. Actually, it takes balls to go on record with such rather precise predictions. And if we look at his track record, I can only say it’s impressive. Let’s just consider his latest (pre-2007) prediction: “Then, we guessed that this would not be followed by the typical recession/recovery pattern of the post-war period. It wasn’t.”. Only this single insight puts him light years ahead of academics (Bernanke, Roubini, Krugman), journalists (AEP, etc.) and other flip-flopping award-winning pundits. Only this insight would probably make him one of the foremost economists in the world and Obama would do well to fire all of his economic Ivy League advisers and hire him instead.

        I used to think Ray Dalio also had a robust way of investigating the world, until I saw his recent comments about US “beautifully deleveraging” (which is a quite stupid thing to say when the federal govt. debt almost doubled, the only slight deleveraging being merely an illusion brought about by a few housing mortgage defaults).

    • One thing I have realised is the internet is a breeding ground for negative people and comments therefore you have to be very careful forming opinions. I try to find positive news to balance this. This is difficult because positive people don’t bother to contribute. They are too busy with other matters. For example Bullish bloggers are not going to trumpet news. They silently accumulate on dips.

      Despite massive structural shifts from high labour cost countries (USA/Australia/UK) to low labour cost countries (China/Thailand/Korea) there are opportunities in new high tech industries (see http://www.westport.com for an exciting new technology that will provide jobs and reduced reliance on foreign oil),

      Provided training schemes are adequate, and the population up to the challenge of acquiring new skills, then structural change will be less of a threat. However despite Politician Hopium, this is extremely difficult for most people, hence discouraged job seekers become the norm.

      The delicate act is prompting people to upskill and look for work, and not make it too easy to take on welfare. Unproductive people are a drag on the economy. Not only are labour costs higher (Employer bid higher wages to attract staff), the cost of taxes to support welfare is a disincentive for those who do work.

      • The internet is a breeding ground for all sorts of people. Sites like Zero Hedge tend to be visited more by those you’d consider negative, for example. I myself, for example, only want to find out the truth and this for me means being negative most of the time: I think it’s much easier to get to the truth in this way, I think things are better defined through what they “lack” other than through anything else. An example: when reading a Wikipedia article about something I usually skip to the “criticisms” section rather quickly so that I can understand the subject more thoroughly; only there you realize how things are in relation to how they were supposed to be.

        And anyway, I don’t think there are many civilizations that have been eradicated due to widespread pessimism – the opposite seems to be the case: irrational exuberance and misplaced optimism got to them.

        I think having the purpose of being positive in life is a rather useless pursuit. I can go on with my life just fine without being positive, thanks. I’m more interested in reality.

        • Via negativa is a useful way to get to the truth. But I’d be careful not to conflate negative epistemology with negative as it is used in lay speech. They’re not the same. Reality is neither happy nor sad, neither upbeat nor downbeat, neither fair nor unfair, neither just nor unjust. Reality is just reality.

        • Yes, thanks for the clarification. I felt that was missing in my text as well. But they do tend to follow each other, and people should learn to separate them in their heads (in other people, they will always conflate them and there’s no hope or worth bothering convincing them otherwise).

        • Andrei, my point was, negative people and negative emotions feed on themselves and we can miss turning points that change the future, I grew up in a world with Nuclear Bombs, and then comes rock and roll which copied by underground movements via copied cassette tapes (ideas were piggy backed before after during song to inform the listener of revolutionery ideas. this bypassed the State), and then the fall of communism happens in a very short time. If I told you this practice is a positive sign and world changing, you may miss an opportunity. Now comes the internet, with revolutions all over the world, people like us communicating and now technologies that unlock the enormous potential of natural gas (www.westport).

          I want to be receptive to positive turning points. Seize the day!

        • @Buddy: Things are not mutually exclusive. The international monetary system, the financial system, the USD as a reserve currency could all die but this will not necessarily prevent concomitant breakthrough developments in medicine/technology/etc. (and the cognitive dissonance that this causes could be dangerous for an investor if not actively monitored). People that are not professional investors should take defensive positions during uncertain times though, I think.

        • I remember in 2008, watching the markets daily, on the hour and seeing the market hit its bottom, then shoot up. The blogs were all negative and one blog stood out. “See Ya Doomers I am catching this ride” It was in relation to printing. This trader knew that printing would flow into equities. That Trader doubled or trippled their money. I was sucked into negativity, and my portfolio suffered. I won’t forget that lesson.

        • “knew that printing would flow into equities”

          As long as you at least base your decisions on some facts like the above trader then at least you stand a chance (but just being contrarian without any facts/evidence is dangerous).

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