How is The Official Unemployment Rate 3.8% When 37% of the U.S is Unemployed?
When I turn on the news these days it seems that there are few reasons to smile, but I have to say- the consistent Unemployment Rate decrease has been a steady source of satisfaction for me.
That is until today- when I found out that the Unemployment Rate is basically just a made up number.
I mean not really, but the Unemployment Rate is not, in any way, an accurate representation of the percentage of the U.S that is actually unemployed.
The Official U.S Unemployment Rate
“People 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.” -bls.gov
So, there are 3 conditions that must be true in order to meet the official definition of Unemployed. If you haven’t actively searched for work in the last 4 weeks (maybe you’ve been in school or maybe you’ve been looking online but haven’t applied for a job yet) you don’t count as Unemployed according to the official definition. You don’t get counted as employed, obviously, either. You actually don’t get counted at all.
- This is very good. Regardless of the relevance of the number, a low Unemployment Rate is better than a high Unemployment Rate.
- The Unemployment Rate has been declining for years and the trend looks like it will continue. Even if the number is not representative of the total Unemployed population, the steadily declining trend is a good thing.
Labor Force Participation Rate
A much better indicator of the total portion of the population that is actually unemployed is the Labor Force Participation Rate.
According to the BLS, the Labor Force Participation Rate defines the “Labor Force” as everyone eligible to work (all people over the age of 16 who are not in jail, in a nursing home, in some other institution, or in the Armed Services) and defines “Employed” as anyone who worked in the last week.
Anyone in the Labor Force who is not Employed is Unemployed, simple.
So, 37% of the population could get a job but they can’t find a job or can’t get someone to give them a job because maybe they aren’t qualified enough.
That’s 37% of the population unemployed versus the 3.8% the government has been blabbing about for months now.
And before you go there, don’t. I like our government. I think for the most part we all do what we can to try and make things work. It’s hard, I get that.
What I don’t understand is the 33% difference between the “Unemployment Rate” and the percentage of people who are unemployed. Like, what’s the point of the Unemployment Rate if it isn’t going to tell us within some degree of accuracy how many people are looking for work?
The most important initiative that we can undertake is to prevent people from getting to month 7 of unemployment.
On a brighter note, the chart produced (below) by the Bureau of Labor Statistics does show that the Labor Force Participation Rate, which I deem to be the real indicator of unemployment, has been recovering since the 2008 financial market crash. As my friend Joe Psotka helped me analyze, the red line on this chart depicts that the % of the population that is employed- so if it goes down, that’s not good. When goes up, more people are employed.
Duration of Unemployment
Another statistic I find wildly fascinating is the Duration of Unemployment stat that details how long it takes an unemployed person to find a job.
The Bureau of Labor Statistics breaks these time periods into 4 groups:
- less than 5 weeks
- 5 weeks — 2 months (14 weeks)
- 3 months (15 weeks) — 6 months (26 weeks)
- 7 months (27 weeks) +
The following is a chart provided by the Bureau of Labor Statistics that depicts the trends over time for the duration of unemployment:
The above chart basically tells the following story:
As of February 2019, approximately:
- 2.5 million people are getting back to work after 5 weeks of job searching
- 2 million people are finding a job within 5–14 weeks of looking for a job
- 1.5 million people are out of work for longer than 7 months
- 1 million people find a job between 3 and 6 months of searching for one
The main concern I have here is that there are more people out of work for longer than 7 months than there are for 3–6 months. This means that if you don’t find a job within 3–6 months, there is a good chance you won’t find one at all. Think about what happens when you’re in month 7 of a job search. The chances are slim that you feel encouraged to keep looking for a job. You probably have low self-esteem, you‘re worn out, and you’re likely broke.
Month 7 seems to me like the month of no return. To me, it feels like the most important initiative that we can undertake as a nation is to prevent people from getting to month 7 of unemployment.
The main lessons I learned, and what I hope I’ve been able to pass on here with this article, is that sometimes a nice sounding number reported by any agency whether it’s the government, a news source, or a media outlet, is so far from the actual truth that it might as well be completely made up.
Definitions are boring, but they matter hugely in some cases. Other statistics, like the Labor Force Participation Rate or the Duration of Unemployment Rate matter way more in drawing accurate conclusions about the actual state of affairs in any given circumstance. If you’re interested in knowing the truth about something and making informed, educated decisions, it’ s worth doing the extra hour or two of research to learn about the forces shaping the system.
I am not a labor market expert nor am I an economist (clearly) but I can think of ways that might help bridge the unemployment gap- or at the very least keep people from getting to the 7-month unemployment mark.
Nudging is one of my favorite concepts. I like the Nudge approach to solving problems because putting a Nudge in place is usually simple, low cost, easy to implement, and effective. This means that any government or non-profit can do it because they have virtually no excuse not to.
What if job boards reached out to specific candidates every Monday and Thursday at 2 PM, instead of waiting for people to find them?
This is an example of a simple, low cost, yet effective Nudge that would get “hopelessly” unemployed people back “in the game.” They would feel sought after, valuable, there is little work involved, and with “one-click applications” they can be seen as actively applying for jobs and thus be counted in the official Unemployment Rate- which will help make that number more honest.