Ciel (cieldumort) wrote in the_recession,

"Unemployment Rate" - What does this really mean? Where do we really stand?

Some of the discussions have brought up need for more clarifications, and/or further research.

For example, it is now clear that pretty much all of us, even the very best economists in the world, are flying blind when it comes down to what is and is not a "Depression."

Help us answer this question, at least for ourselves, by reading this post, and then taking this subsequent poll.

Another often misunderstood economic measure that is very much in the press these days, and has been getting a lot of attention in the community as well, is the "Unemployment Rate." What is the Unemployment Rate? What does it really mean? How does it get measured? How does the current Unemployment Rate compare to those of past recessions? Of past expansions?

Here are some Unemployment Rate primers, as well as some quotes and links from very relevant recent unemployment data releases.

Alternative Measures of Labor Underutilization
Measure: Definition:
U1 Persons unemployed 15 weeks or longer, as a percent of the civilian labor force
U2 Job losers and persons who completed temporary jobs, as a percent of the civilian labor force
U3 Total unemployed, as a percent of the civilian labor force.
(The official unemployment rate).
This is the Unemployment Rate that gets "officially" reported.
U4 Total unemployed, plus discouraged** workers.
U5 Total unemployed, plus discouraged** workers, plus all other marginally attached workers* as a percent of the civilian labor force plus all marginally attached workers
U6 Total unemployed, plus all marginally attached workers**, plus total employed part time for economic reasons***. This is the "broadest" measure of unemployment that gets officially tracked. U6 has been in existence since 1994, but a very similar series was also in existence dating back to 1970, and the two are sometimes used interchangeably.
Notes: *Marginally attached workers are those who are neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime in the recent past.
  **Discouraged workers, a subset of marginally attached workers, have given a job-market-related reason for not currently looking for a job.
  ***Persons employed part time for economic reasons are those who want and are available for full-time work but have had to settle for a part-time schedule
("Involuntary part-time workers" )

After reviewing the chart behind the cut, we at least have a realistic starting point for understanding what is meant when we read "Unemployment Rate is now (fill in the blank)."

So, the unemployment rate in November went up to 6.7% from October's 6.5%. That's an increase, but it doesn't sound so bad. After all, ideologically limited government think tanks who wish to put an immediate halt to any and all government intervention in this mess keep reminding us that the unemployment rate in the early '80s "was over 10%." But as with all numbers, one can often slice and dice them to paint whatever image one wants to, for an otherwise under-informed and/or unsuspecting audience.

World famous liberal economist, Paul Krugman, actually does no manipulating of the past several year's worth of employment data, and yet can refute the "these unemployment numbers are not so bad" claims with relative ease (See below):

Terrible employment numbers

A slump, a weak recovery, a worse slump

Most commentary on the terrible employment report has focused on the establishment numbers, because the number from the household survey that usually makes headlines, the unemployment rate, didn’t rise all that much. But the jobs picture from the establishment survey looks terrible, too; what held the unemployment rate down was a reduction in the number of people who said they were looking for work.

The chart above shows the employment-population ratio, the ratio of employed Americans to the adult population. By this measure it’s been a weak economy all along — and now it’s falling off a cliff.    (Credit: Paul Krugman)

In the article above from Paul Krugman in the New York Times, it is obvious that the official Unemployment Rate probably should not be the only indicator worth paying attention to for clues as to the relative real health of the civilian labor market.

In the graph above, provided by the Federal Reserve Bank of St. Louis, it becomes clear that the percentage of Americans actually "working" (U3, U4, U6, whatever) can be largely affected by the numbers of people who have "given up" looking for work, or who are clinging to PT schedules just to keep or get a job, even though they were seeking or previously held FT positions.

By this measure, the Civilian Employment to Population Ratio, the current recession even looks like a nasty continuation of a weakening labor market that began in early 2001, as if this has all been one very long, protracted Japan-lite recovery following the post-bubble downturn of 2000-2003, and the most recent, and now dramatically deepening, recession of 2008.

It has often been said that G.D.P (Gross Domestic Product) this decade has been grossly overstating the real economy, and in fact, G.D.P. less M.E.W. (Mortgage Equity Withdraw), AKA (debt), AKA ("hallucinated wealth"), shows that the early 00s recession was very much longer than simple G.D.P. figures would suggest, and the real recovery was far, far weaker, as well:

Well, some of us believe that we are all now paying dearly for that very large and protracted gap between the growth without including the vastly expanding levels of household debt, debt that we now know all too well was leveraged against unrealistic real estate valuations, and the published GDP figures, which were including all of the debt we were taking on throughout this decade.

Getting back to  the topic at hand (Unemployment Rate) -

While many articles stay focused on the published (U3) measurement of unemployment, which, at 6.7%, is indeed still lower than the peaks reached in the 1973-5 recession, early 80s back-to-back recessions, and the recession of the early 1990s,  facts very inconsistent with taking that to suggest that what is going on today is merely a "mental recession,"  remain: 

1) As we can tell from the graph above from the St. Louis Federal Reserve, U3 can fail to adequately capture the "what's really happening on the ground" employment-unemployment situation.

2) The Post WWII record of double-digit U3 (published unemployment rate) hit in the early 1980s was a) Only briefly at or above 10.0%. The rest of the time it was even mostly under 8.5%, and b) in those recessions, the increase in the U3 measurement required to get to their respective peaks was quite a bit less than would be required at the start of the current downturn, as U3 had declined to a much lower baseline by 2006.

So, if you have stayed with me this far, a final note worthy of strong consideration comes from this Dec. 5 article in the Wall Street Journal:

Broader Unemployment Rate Hits 12.5%

The headline unemployment rate of 6.7% in November isn’t the only one the Labor Department reports. They also break the rate down by age, gender, ethnicity, and education. And in table A-12, on page 19 of the report, they also share their broadest estimate of the unemployment rate, which includes the total unemployed (the standard rate) plus “all marginally attached workers, plus total employed part time for economic reasons… plus all marginally attached workers.”

That rate (called “U-6”) in November? A whopping 12.5%.

The U-6 rate only has comparable history back to 1994, but November’s rate is by far the highest since then and the swift rise to that elevated level also far surpasses similar moves during the recessions in 2001 and 1990-91. Previously, the Labor Dept. kept a similar gauge with history back to 1970, showing a high of 14% unemployment during the deep recession in 1982.

The U-6 rate rose sharply in November, from 11.8% in October, and is markedly higher now than the 8.4% recorded in November 2007.

“It was already clear that this would be ‘one of the worst recessions’ in the post-war period,” said Nigel Gault, chief U.S. economist at IHS Global Insight. “After today’s horrendous November employment report, it is beginning to look like the worst.” –Kelly Evans 

Tags: gdp, mew, nonfarm payrolls, recessions, u3, u6, unemployment rate
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