Unemployment Rates: Understanding the Big Picture

 

We are advocates of a careful, balanced consideration of economic data.  We accept the results whether they are hopeful or dismal.  We do not shift our chosen indicators with the wind.  Investors should do the same.

Barry Ritholtz at The Big Picture, one of our featured sites, has made a useful suggestion concerning balanced reporting on unemployment.  While we agree with his general point, there is a bit more to the story.  Barry's opinions are quite important.  The impact of financial blogs has increased, and he has the strongest voice, including his most recent accomplishment, the Gold Medal from an investment publication--nice going, Barry.

The Ritholtz Proposal

In his widely-read article Barry proposes that the financial media focuses too much on a single measure of unemployment, what the BLS calls U-3.  He recommends that the media should also report the broadest measure, U-6, which also captures workers who involuntarily accept part-time employment.

With due modesty, Barry notes that many believe he has influenced the reporting of data in the financial press, and might do so again.  We strongly agree with his conclusion.  We think that the press could do a much better job of showing the nuances of unemployment, and that his voice is a strong one.  The lead paragraphs often do not capture the full story.

A Point of Disagreement

Barry believes that the definition of U-3 has changed over time to paint a more favorable picture of unemployment.  He writes as follows:

U3 is the "official unemployment rate" according to the BLS website. Due to this, it is the current measure of Unemployment that gets focused upon by most media, and therefore the public. It has, over the years, slowly excluded many of the factors that USED to go into how the US reported unemployment. Hence, there has been a gradual decrease in the Unemployment rate that has occurred regardless of what was happening in the Jobs market.
U3 is now comprised in a way that merely repeating it without a slew of caveats borders on fraud.

We disagree with this conclusion.  If one goes to the source he cites, and actually reads the article, one sees something quite different.  The authors write as follows:

The official measure has withstood the test of time largely because of its objectivity.  As measured via the CPS, the employment status of individuals is determined solely by their work-related and job-search activities during a specific reference week.  In essence, persons who did no work, but who searched for a job (sometime in the 4 weeks prior to the survey) and were currently available to take one had it been offered, are classified as unemployed.  Those who met neither test are "not in the labor force."

The inherent objectivity of the official measure also explains, in part, why it and other statistics are occasionally subject to criticism.  Without question, the consequences of unemployment are more serious for some workers than for others, and some users would like to have a more narrowly targeted measure.  At the other end of the spectrum, there are those who feel that the official statistics understate the full dimensions of the unemployment problem. 

The BLS has provided a range of different measures, beginning in the 70s but has not changed the definition of U-3.  The assertion that this series compares "apples and oranges" is simply incorrect.

Our Own Suggestion

Please consider the table Barry cites, with a small addition from us.

We wish to augment Barry's proposal.  We suggest that the media also report the narrowest measure of unemployment, U-1.  We have circled these values in blue on the table.  Barry's circles are in red.  The U-1 measure has also moved negatively in the last year, rising from 1.5% to 1.8% during the last year.  This is a 20% increase in longer-term unemployment, consistent with a slower rate of economic growth.  It shows an important increase in long-term unemployment.  Having said this, the overall rate of serious unemployment is much lower than the other measures.  Why?

The narrow measure is important because of the concept of frictional employment.  There are always people who are changing jobs because of personal choices, one partner in a marriage moving, or economic dislocation.  At a time of economic change, one would expect frictional employment to be higher.

The narrow measure shows those who remain unemployed for fifteen weeks or longer.  It captures important information about the severity of economic effects versus normal frictional changes.

For these reasons, we hope that Barry will also use his strong voice to advocate that media sources should cite this number, as well as the broadest possible measure.

Comments

[Will Rahal]

There will always be an imperfect measurement. But I agree that the key is understanding the measurements.
The increase in the unemployment rate is closely related to a drop in income(of course) and this is one of the driving forces behind an economic slowdown.
Both the 6 and 12-month percent change in real wages have dropped to levels associated with recessions.

[notsosmart]

to me its very simple.most people are not unemplyed because the spouse found a job somewhere else. most people are without work because the were laid off for various reasons.they would still be on that job.the statistics dont even count teachers not eligible for unemployment(there are many).this govt.just cant tell the truth.sad.

[WAKEUP]

The federal government has absolutely no incentive to report the full extent of unemployment. The truth would show that the federal government is dysfunctional, when it comes to creating real jobs. Please do not bore me with the argument that it is not the responsibility of the federal government to create jobs. It certainly is their responsibility, as they are given the privilege of governing. As long as the option of lying about this data exists, the federal government will always lie.

[bearfund]

WAKEUP, your first and last sentences are correct. But you've taken two pieces of quality bread and made a
[Comment edited for abusive language. Commenter put on watch.] sandwich of them. To "govern" means to establish, publish, and enforce a set of limits on behaviour. Good governments establish these limits wisely, communicate them transparently, enforce them vigorously, and do all of this at minimal cost. Bad governments fail some or all these tests. The US federal government fails all of them. But nowhere in the description of what it means to govern is there the idea that the government is somehow responsible for employing more people than it needs to fulfill its own purpose; indeed, doing so would cause it to fail the fourth test. If you want to assert that employment is lower than it should be as a result of unwise regulations or inadequate or inconsistent enforcement, you'll find plenty of people in agreement. But employment is not lower because the government has failed to create jobs. Jobs are created when more output is demanded by the market than those currently employed can produce, and destroyed when the opposite occurs. Despite its best efforts to do so, the government cannot create demand from nothing without creating inflation right along with it. These are fundamental facts about the way markets work. I'm sorry you don't like them, but nothing you can say or do is going to change them.

[WAKEUP]

To bearfund: I anticipated that someone would feel an uncontrollable urge to post something like you posted. That's why I requested not to be bored with this argument.

[bearfund]

WAKEUP, then why are you here? Central planning and socialism are pretty much incompatible with concepts like profit, risk, and alpha, which are what this site is about.

[sspec]

BLS employment data are based on too small a sample and easily manipulated for political purposes.

A more comprehensive picture of total employment can be gleamed from looking at the Daily US Treasury Report. In that report you can find the daily amount of taxes withheld from wages and deposit with the UST. In the first 5 months,compared to the same period last year, taxes withheld form wages is up 2%. Through the first half of June taxes withheld are up 4% over June 2007.

Since the UST collects the taxes withheld from all legal wages filed by employers Form 914 filings, it has a more accurate and current account of the number of people employed than does the BLS. That means the number of real people employed by wages, by state, by industry, etc.

However the media and financial markets concentrate it's employment view based on a mid month sampling by the BLS of 400,000 business establishment in month 1. In subsequent months the data is later revised up in month 2, and again month 3 by as more data are collected.

The BLS employment household survey is based on telephone sampling. The question is, how many people in your household is employed.

Pressure by the media should be brought on the current and future administrations to have the employment data reported by the UST. They have the real data regarding employment and wages. It's the real data that influence the economy, not survey data.

[WAKEUP]

This is silly. You are not used to having anyone talk back to you, are you? I already raised my children. I am not going to raise you.

[carey_jim]

Excellent article.

It's always in the best interest of the public to report as much information as possible so that intelligent people can draw their own conclusions from the data.

There is a noxious view, a philosophy if you will, that has "stalked the land" for many decades and that holds reality to be an interpretation only without any substance underneath and beyond perception.

Realists scoff at this idea and can't believe that it has any power. But it is the driving force behind all propaganda and advertising attempts to "shape" reality and, in fact which try to PRODUCE reality itself.

We need to fight the attempt of the powerful to try to "create reality" by manipulating data, whether they are Communist totalitarians, Oligarchs or any other group trying to maintain power with lies.

It is human and unavoidable to put things into a good or bad light to further our own causes but it is destructive and even suicidal to believe that we can create reality by simply thinking good or bad thoughts, head in the ground and tails exposed to kicking like ostriches.

The world out there exists, and does not always agree with our heart's desire.

I wonder why that truth is so hard to understand and follow?