# Official Unemployment Numbers Understate the Problem

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by: John Lounsbury

Mike Shedlock (Mish) has produced an excellent graph in his article, "The Decade of Lost Jobs", which can be read in full here. (Hat tip to Phil's Stock World.com/.) Mish's graph is reproduced below and is followed by my discussion of some of the factors behind the trend shown. The conclusions may surprise you.

In looking into what's behind Mish's work, I chose to look at the total employment numbers from the DOL. One of Mish's conclusion is that more than 2/3 of the meager job growth of the past 10 years has been in government jobs, not in the private sector. I have nothing to add to that conclusion.

The following table was constructed (by me) with data from the U.S. Dept of Labor (DOL), using Seasonally Adjusted data:

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In the past ten years, the following has occurred (from data in table above):

• The civilian population over 16 has grown by 28 million
• The labor force has grown by 16 million
• The number of those not in the labor force has grown by 12 million
• The number of jobs has grown by 7.3 million

Although the number of employed has increased over the 10 years by 7,259, the number of unemployed has increased by 8,715. This constitutes a relative job shrinkage of 1.5 million by subtracting the increase in the number unemployed from the increase in the number employed (7,259 - 8,715 = -1,456). If you add these two numbers together (instead of subtracting), the total is 15,794, the exact increase in the labor force reported by the DOL, so the data is internally self-consistent.

The growth in the number not in the labor force results from an increase in the student age population still in school, increase in the number of retirees and increase in the number of discouraged unemployed no longer looking for work. So, the past ten years has seen an increase in working age people not in the labor force (12 million), almost as large as the increase in the number of people in the labor force (16 million) and a decrease in the relative number of jobs of 1.5 million.

This is not a pretty picture: There was a gain of 11.5% in the labor force, compared to a gain of 17.6% in the total not in the labor force. During this period, the population grew from 272.4 million to 306.5 million (U.S. Census Bureau), or 12.5%. The ten-year population growth rate was greater than the growth rate in the labor force and much less than the growth rate for those not in the labor force. These numbers are summarized in the following table (Seasonally Adjusted data):

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Currently the unemployment rate is at 9.4%. Many think it will go higher before it goes lower, but what would things look like today if the unemployment rate were to return to 5%? Those numbers are summarized in the following table, using Seasonally Adjusted Data:

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Unemployment of 5% is generally considered to be the equilibrium point which is considered virtually full employment. If we were at that point today, the 7.3 million jobs gained during the past ten years would be increased by 6.8 million to 14.1 million jobs gained. That number should be compared to the increase in the labor force since 1999 of 15.5 million. This (14.1 million jobs gained) is close to the expected number 15.2 million (95% of 15.974), but is still 1.1 million short. This close to the 1.5 million found earlier for the difference between the increase in the number unemployed and the increase in the number employed over the past 10 years. It seems to me that these two numbers should be the same and I have not rationalized why they are different.

At 9.4% unemployment, we are almost 8 million jobs short of keeping up with growth in the labor force. At "full" employment (unemployment of 5%), we would still be over a million jobs short. These estimates are influenced by two facts: (1) more people have lost jobs (or failed to find employment upon entering the labor force) in the 10 year period than have gained employment and (2) the number of people not in the labor force is increasing at a much faster rate than the number in the labor force.

Another factor that is not included in this discussion is the effect of slack in employment due to a large number of people working part-time for economic reasons (Ie, not by choice). There has been a large rise in involuntary part-time employment over the past 10 years. In a previous article (here) I have estimated that the implied number of unemployed if you count 40 hours per week as one person employed is possibly as high as 39 million. While this estimate is certainly too high (I am working on a better calculation), the final estimate will be probably be in the range 20 to 30 million, much larger than the official unemployment total of 14 million.

The large increase in involuntary part-time employment is likely hiding a more severe distress in the labor market than is portrayed by U-3. Even U-6 may understate this distortion. More will come on analysis in this area in a later article after more research is completed.

The rest of the world is also seeing a dramatic increase in part-time employment, as reported by the Financial Times here.

In conclusion, the current unemployment rate (whether U-3 or U-6) is not properly accounting for some serious problems. These are:

1. Over the last 10 years, the number of people not in the labor force has grown proportionally faster than the number in the labor force.
2. Over the past 10 years, the number of unemployed has grown more than the number of employed.
3. The impact of growth in involuntary part-time employment is not properly recognized in the official DOL unemployment rate.