Why does this calculation need to go? Why do we misuse it? And what is another unemployment rate stat we should be using?
Now to start, what’s the solution? I believe the rate needs to be re-worked. It’s got to account for gig work and exclude part time workers. Also, underemployed individuals need to not count as employed. Now, the rate I like to look at is the LISEP rate. It’s going to measure the US labor force as functionally employed meaning they use data from the BLS and calculate it as percentage of US labor force that does not have a full-time job (35 hours at least) and wants one and doesn’t earn a living wage marked at 20,000 years before taxes. What’s great about this stat is it doesn’t include part time or people making less than 20k as employed. In May of 2023, the rate was 22.4% nearly 6 times the official unemployment rate by the Fed.
Now the unemployment rate is widely regarded as one of the key stats when measuring the health of the economy. Today we are still seeing one of the lowest rates in decades and it raises the question why is this happening? To really understand why this happening we need to first look at the calculation.
There are several types of unemployment rate calculations but lets focus on the U3 which is the official unemployment rate and the rate quoted in the media.
The calculation for the unemployment rate is as follows: The number of unemployed people divided by the labor force. Let’s dig into to these numbers more. Unemployed meets the conditions of: not unemployed during the survey week and available to work. Also, made one specific effort to find work during in the last four weeks. So, there needs to be a genuine effort to find a job. Active searching for a job needs to meet certain criteria such as having a job interview or contacting an employer about a job. What’s odd is looking at job postings does not qualify?
Now the labor force is composed of employed and those unemployed. People excluded are several groups. And these numbers, in my opinion, are underrepresenting the real employment rate and the health of the economy.
The first is “People who want a Job Now” which are basically people not currently working and have not looked for work in the last four weeks. Second, “Marginally Attached to the labor force” are going to be individuals who have looked for work in the last year but not looked in the last four weeks. There are two groups here: discouraged workers and other people marginally attached to the labor force.
Discouraged workers have essentially given up looking for work. One of the issues with this is long term unemployment is being excluded. Other people marginally attached stopped looking for reasons such as bad health or family responsibilities. The issue with this is your excluding people who might take a job if the pay was good. For example, a mom might consider getting a job, but the pay might not outweigh childcare costs.
So, let’s take a look at some of the big flaws of the rate.
First, the rate was created in the 30s and was based on a time when the economy was much simpler. There was one income earner in the family. Today things are much more complex in our economy. 36% of the workforce participates in the gig economy, with many people working multiple part time jobs. To complicate matters, the younger people simply don’t want the 9-5 job and are choosing flexibility over stability. We’re seeing it more and more. This causes issues with measuring the rate as these jobs tend to be less stable and unemployment between gigs is common. It’s really well-known economists don’t really have the metrics to understand this yet.
The second reason the unemployment rate is flawed is that it doesn’t account for underemployment. Remember, part time work is considered full time work in the statistic. If I’m working 20 hours a week, I’m considered “employed” and this artificially boosts the unemployment rate. Also, average hourly earnings are not considered in the calculation. These have increased but not nearly enough to keep up with inflation. So, what we’re seeing is individuals working multiple jobs. It’s been reported that more individuals than ever are working multiple jobs to pay bills. The BLS only reports this number as 5% but this doesn’t account for gig work.
Coming back to the unemployment rate, the third issue is discouraged workers are excluded. What you need to remember with this is that these people are unemployed and can be unemployed for long periods. Right now, this is millions of Americans.
Another reason is the number of people who left the workforce b/c of the pandemic. Some people were forced out due to health reasons others took early retirement. The number estimated is around 3 million. We could expect the unemployment rate to be higher if they were included.
Another reason the statistic is weak is it’s a lagging indicator.
It’s a stat that’s good to have if you want to measure trends but not great at measuring the current scenario. A better option is the unemployment claims which spiked during covid (in March 2020).
Now, a lot of economists do look at the U6 employment rate which includes discouraged workers, underemployed and marginally attached, but this figure doesn’t get used in the mainstream.
What’s this mean. To me, it means the rate is not good a measure of the economy. Affordability and cost of living are not factored in.
