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: