Each month, the Bureau of Labor Statistics (BLS) of the U. S. Department of Labor sends out a press release announcing the total number of employed and unemployed persons in the United States for the previous month, along with many characteristics of such persons. Many people think that the federal unemployment rate is derived by adding the total of claims filed for unemployment insurance benefits under State or Federal Government programs. This isn’t the case. Let’s examine how the unemployment rate is generated to see how accurate it is.
The January 2011 official unemployment rate was 9.0%, down from 9.4% in December, and a high of 10.2% in November 2009 during the Great Recession. Some people claim that if the unemployment rate were calculated as it was during the Great Depression, the current rate would be close to double what it is and nearly as high as the rates back in the 1930s. The problem with this claim is that there was no official unemployment rate until the 1940s. The rates we use today for this era were reconstructed after the fact based on the work of three economists: Stanley Lebergott, Michael Darby, and G. H. Moore. Libergott included those on work-relief as unemployed while Darby did not. Libergott and Darby agreed on an unemployment rate of 3.2% in 1929 rising to a high of 23.6% and 22.9% respectively in 1932. After the work-relief programs began in 1934, their rates diverged to a peak in 1936 of 16.9% compared to 9.9%. If you compare the two series, it appears that between 1934 and 1941, WPA projects took two to 3.5 million workers off the unemployment roles, and shaved the rate by 4 to 7 percentage points.
During the Great Depression, a number of ad hoc attempts were made to calculate the rate using various sampling methods, which led to widely divergent results. In 1940, the Work Projects Administration (WPA) began publishing statistics on those working, those looking for work, and those doing something else based on a survey of a sample population.
In 1962, high unemployment and two recessions in three years led to the formation of The President’s Committee to Appraise Employment and Unemployment Statistics to reassess the concepts used in gathering labor-market data by the BLS. The Committee suggested some improvements, and the BLS tested new survey techniques for several years, before making a number of changes in 1967. The Committee also recognized the need for more detailed data on persons outside the labor force, and the BLS began collecting information on those who wanted a job although they were not looking for work.
Among the most important changes was the requirement that workers must have actively sought employment in the last four weeks in order to be classified as unemployment.
In 1976, the BLS first published the original U1 to U7 tables to provide more information on the hidden unemployed, who would be part of the labor force in a full-employment scenario. These tables were revised in the 1994 redesign (becoming U1 to U6) and added the requirement that discouraged workers must have sought work in the prior year.
U1: Percentage of labor force unemployed 15 weeks or longer.
U2: Percentage of labor force that lost jobs or completed temporary work.
U3: Official unemployment rate that is the proportion of the civilian labor force that is unemployed but actively seeking employment.
U4: U3 rate + “discouraged workers who have stopped looking for work.
U5: U4 rate + other “marginally attached workers” who would like and are able to work, but have not looked for work recently.
U6: U5 rate + part-time workers who want to work full time, but cannot due to economic reasons.
These unemployment rates are derived from a monthly survey of 60,000 households known as the Current Population Survey (CPS). The CPS sample is selected to be representative of the entire population of the U. S. All of the counties and county-equivalent cities in the country are grouped into 2,025 geographic areas (sampling units), and the Census Bureau then designs and selects a sample consisting of 824 of these geographic areas to represent each state and the District of Columbia. The sample is a State-based design and reflects urban and rural areas, different types of industrial and farming areas, and the major geographic divisions of each state. This mix of geographic areas to represent each state is important because there is a wide range of unemployment rates from state to state. For example, North Dakota had the lowest rate for December 2010 at 3.8%, while Nevada had the highest rate at 14.5%, with California not far behind at 12.5%.
Every month, 25% of the households in the sample are changed, so that no household is interviewed more than four consecutive months. After a household is interviewed for four consecutive months, it leaves the sample for eight months, and then is interviewed for the same four calendar months a year later, before leaving the sample for good. This procedure results in approximately 75 percent of the sample remaining the same from month to month and 50 percent from year to year.
Each month, 2,200 Census Bureau employees pose questions regarding whether individuals in the home have a job or if they are laid off. Other questions query whether the persons are available for work, and the techniques they have used to look for work in the preceding month. At the time of the first household interview, the interviewer prepares a roster of the household members, including their personal characteristics, date of birth, sex, race, marital status, education, and so on, and their relationships to the head of household. The interviewers don’t decide on the respondents’ labor force classification. They simply ask the questions in the prescribed way and record the answers. Based on information collected in the survey and definitions programmed into the computer, individuals are then classified as employed, unemployed, or not in the labor force.
This information is then compared as a percentage to the number of people in the labor force, which consists of all persons employed or unemployed over the age of 15 and not on active duty in the Armed Forces or in an institution (correctional facility, residential nursing, or mental health care facility.)
The information collected is adjusted to account for independent population estimates across the entire nation. These adjustments take into account factors such as state of residence, sex, age, and race. The rate is calculated by dividing the total of the civilian labor force by the number of unemployed to get the percentage of unemployed. The BLS releases the data collected on the first Friday of each month as the national unemployment rate.
Is it possible to skew the numbers to make the unemployment rate look better than it really is? Yes, and there are two main ways to do it: (1) select the geographic areas that have the lowest rate of unemployment as your sample to come up with a lower number of unemployed persons or (2) lower the number representing the total of the civilian labor force so that you get a lower percentage when dividing that number by the number of unemployed. In addition, methods one and two could be combined.
It’s widely understood that it takes about 200,000 new jobs each month to stay even with the workers entering the labor force. Economists say that it takes the creation of about 3,000,000 jobs to lower the unemployment by a full percentage point. They also say that you need 5% GDP growth to lower the rate by a full percentage point. Neither of these occurred in 2010. The national GDP growth was only 2.8% for 2010 and is predicted to grow by only 3.5% in 2011. Less than a million new jobs were created last year. Separate government data shows that only 36,000 net jobs were created in January, barely a quarter of the number needed to keep pace with population growth. Taking this into consideration, does it seem real that the official U3 unemployment rate dropped by .4 percent this January from 9.4% to 9.0%? Remember, this is the same administration that directed the BLS to stop producing the jobs in manufacturing chart last March when the number of manufacturing jobs dropped below twelve million.
What did happen was that 2.2 million left the labor force in the past year, meaning that there was a lower number to use as the numerator for dividing the number of unemployed to get the unemployment percentage. These are people who have given up looking for a job. The real unemployment rate is the U6 rate that includes the “discouraged workers” and workers with a part-time job that want a full-time job. The U6 rate on the BLS website for January is 16.1%.
According to a Gallup poll released on February 12th, the U. S. unemployment rate is 10.2%, and the underemployed rate (equivalent to the U6 rate) is 19.7%, rounded off to 20% on the Gallup website. Another recent Gallup poll shows that 35% of Americans feel unemployment is the biggest challenge facing the nation right now.
Involuntary unemployment has devastating effects on American workers and their families. Long-term unemployment leads to depression and despair to illness. Loss of American employment decreases household wealth, reducing consumption of locally manufactured goods, which further stifles job creation. Joblessness, homelessness, and hopelessness are the end result.
We need a plan to rebuild America to create the jobs Americans need. The Reshoring Initiative is a good start to bring manufacturing work back to the United States from offshore to create more higher paying jobs for Americans. Only then will the unemployment rate truly drop, and local, state, and budget deficits will begin to diminish.
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