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Aug 02 2010

Calculating unemployment levels

In a previous post, I said that “One of the things that seems obvious to me but most people seem unaware of is that the US is a country in deep decline and if no corrective action is taken soon it will end up just like many other failed empire in history, collapsing from within due to a combination of hubris, arrogance, and greed.” Readers might have been excused for being somewhat skeptical since things don’t seem so dire and we hear upbeat reports about how things are getting better. In the next series of posts I will show how the real state of the economy is being kept hidden to make things look good, or at least not terrible.

In any democratic society, the most sensitive number politically is the level of unemployment. If it is high, then one has public unrest and strong dissatisfaction with the government. If it is low, then workers can bargain for better wages and benefits and so the business sector’s profits get reduced, which makes corporate CEOs and their shareholders unhappy. In oligarchic societies like the US, the needs of the corporate sector always win out so governments tend to pursue policies that prevent full employment while simultaneously taking steps to curb public unhappiness by either giving them some benefits temporarily to help them get used to the idea of not working or hiding from them how bad the situation is.

In the US it is the Bureau of Labor Statistics that keeps track of unemployment numbers. In the current recession, the ‘official’ unemployment level has reached close to 10% and is staying there despite stimulus packages and the like. This is high by historic US standards and it is surprising that it has not created as much unrest as one might expect. But what people may not know is that the ‘real’ rate of unemployment is much higher, maybe twice as much, and that the lower official figure is the result of a steady process of cooking the books over the past few decades.

The unemployment rate is calculated as the number of unemployed workers divided by the total labor force, and the resulting number is multiplied by 100 to get a percentage. (The definitions of employed, unemployed, and total labor force is given here.) By finding ways to make the numerator smaller and/or the denominator larger, one can make the rate smaller. To be counted among the unemployed, one has to meet fairly strict criteria:

Persons 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. Actively looking for work may consist of any of the following activities:

  • Contacting: an employer directly or having a job interview; public or private employment agency; friends or relatives; a school or university employment center

  • Sending out resumes or filling out applications
  • Placing or answering advertisements
  • Checking union or professional registers
  • Some other means of active job search

Passive methods of job search do not have the potential to result in a job offer and therefore do not qualify as active job search methods. Examples of passive methods include attending a job training program or course, or merely reading about job openings that are posted in newspapers or on the Internet.

There are categories other than employed and unemployed. ‘Marginally attached’ workers are “persons without jobs who are not currently looking for work (and therefore are not counted as unemployed), but who nevertheless have demonstrated some degree of labor force attachment. Specifically, to be counted as “marginally attached to the labor force,” individuals must indicate that they currently want a job, have looked for work in the last 12 months (or since they last worked if they worked within the last 12 months), and are available for work.”

‘Discouraged workers’ are “a subset of the marginally attached. Discouraged workers report they are not currently looking for work for one of four reasons:

  1. They believe no job is available to them in their line of work or area.

  2. They had previously been unable to find work.
  3. They lack the necessary schooling, training, skills, or experience.
  4. Employers think they are too young or too old, or they face some other type of discrimination.

Depending on which categories of workers you count as unemployed, there are six measures of unemployment:

  • U-1: Persons unemployed 15 weeks or longer, as a percent of the civilian labor force

  • U-2: Job losers and persons who completed temporary jobs, as a percent of the civilian labor force
  • U-3: Total unemployed persons, as a percent of the civilian labor force (this is the ‘official’ unemployment rate that the government and media publicize)
  • U-4: Total unemployed persons (i.e., U-3) plus discouraged workers, as a percent of the civilian labor force plus discouraged workers
  • U-5: Total unemployed persons, plus discouraged workers (i.e., U-4) plus all other “marginally attached” workers, as a percent of the civilian labor force plus all “marginally attached” workers
  • U-6: Total unemployed persons, plus all “marginally attached” workers (i.e., U-5) plus all persons employed part time for economic reasons, as a percent of the civilian labor force plus all “marginally attached” workers

So if a member of the ‘officially’ unemployed gets so discouraged that he/she stops even looking for work (which is a bad thing), U-4 remains unchanged but the official unemployment rate U-3 actually goes down, which looks like a good thing. Similarly, if you are forced to work part-time as a greeter at Wal-Mart because you cannot get a full time job, you drop out of the U-3 category (again reducing the official unemployment rate) but the U-6 figure remains unchanged.

Looking only at the U-3 number makes things seem rosier than they really are.

Next: Cooking the books on the unemployed.

POST SCRIPT: Film review: Up in the Air

This film is really good. It stars George Clooney as someone whom companies hire to perform the distasteful task of firing their employees and getting them to accept the severance package. The film shows the varied reactions of people upon learning that despite having put in many years of faithful service, they are now being unceremoniously dumped by a total stranger. Their emotions range over sad and angry and humiliated and despair, the last one especially common among older workers who know that their chances of ever getting another job are slim to none.

Clooney is this generation’s Cary Grant, a good-looking charmer with a roguish twinkle in his eye who can make even an unsavory character appealing. In this film he plays someone who is really good at doing what should be a truly nasty soul-killing job and even takes pride in doing it well. Like a lot of us guys, he has set his heart on achieving some quite pointless goal in life, in his case to rack up 10 million frequent flyer miles, which he pursues with great dedication. And yet he manages to make this shallow person come off as sympathetic and even likable. Writer-director Jason Reitman seems to have a knack for pulling off this trick, having done it before with Thank You For Smoking, in which the main character is a shill for the tobacco industry.

The film’s examination of the essential rootlessness of Clooney’s character and the contrast with the strong ties in which the people he fires are enmeshed, is excellent. Although it is a serious film, it is also a funny one with great writing. It is well-worth seeing. Here’s the trailer:

7 comments

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  1. 1
    Delano Uduman

    Mano, over here in Sri Lanka, the official rate of unemployment is calculated as per your measure U3. However, one major factor which tends to distort this figure is the level of ‘under-employment’, which is defined as being engaged in an occupation which is not on par with the educational achievements or set of skills possessed by the individual. E.g. An Accountant who could only get a job as a Lecturer at a Tutory. Therefore, although such persons are technically ‘employed’, they do exert considerable pressure on the labour force market. Would such persons belong to the ‘marginally attached’ or ‘discouraged worker’ categories as defined by you ?

  2. 2
    Mano

    Delano,

    The International Labor Organization (ILO) has adopted something close to U-3 as the standard in order to compare similar figures across countries, which is why Sri Lanka also uses that.

    The person you describe would, as I see it, not be discouraged or marginally attached but be in the unlabeled category that is counted in U-6.

  3. 3
    Harry

    Thank you, Mano!

    “One of the things that seems obvious to me but most people seem unaware of is that the US is a country in deep decline and if no corrective action is taken soon it will end up just like many other failed empire in history, collapsing from within due to a combination of hubris, arrogance, and greed.”

    I’ve said similiar things to presumably intelligent people … and I usually get blank stares.

    Thank you for your willingness to tell the truth.

  4. 4
    Reggie Barnett

    Harry, I would have to disagree with you because we may be the central hub in the global economy and we are facing a terrible recession, but if you really think about it you’ll notice there is something things positively going on as well. More and more people are realizing what actually financial security is, and it is can be obtained without a job…

    Reggie Barnett

  5. 5
    Barry Milton -

    Mano,

    An excellent post. If the numbers look bad, just change how you calculate them! Is America in decline? One would suggest that cooking the books on unemployment figures would suggest this is the case.

    Barry Milton

  6. 6
    Andy

    Reggie,

    Being an entrepreneur isn’t for everybody, though it can be good for a lot of people who are out of work. Some people like to have a financial security of employment and don’t feel secure being self-employed. For others, striking out on their own is the best thing they do in life.

    Andy

  7. 7
    William H. Kimball

    Common sense is so rare it should be classified as a super power. SOOOO TRUE!!!

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