Dirty Little Secret Unemployment Rates

Remember when steadily climbing unemployment rates had employees looking over their shoulders, wondering if they would be next in line for a pink slip? It wasn’t so long ago that the unemployment rate peaked at 10%, leaving many highly qualified workers scrambling for whatever jobs they could find. Last month, however, the Bureau of Labor Statistics reported an unemployment rate of just 5.7%, a number that has everybody breathing easier. But should they?

When 5.7% Isn’t Really 5.7%

The unemployment rate measures only those workers who are not currently employed for any number of hours for any employer, and who actively sought work in the four weeks prior to the issuance of the report. There are several key groups not included in this number:

  • Long-Term Unemployed—This group primarily consists of people who have been out of work so long that they have given up hope. The longer you go without a job, the smaller your chances of getting a callback for an interview. That leaves many long-term unemployed workers discouraged and frustrated to the point of abandoning their job search efforts.
  • Underemployed—Let’s say you work as a sales representative for a national firm, making a decent salary to support your family. What happens when your job gets cut? You could sit around surfing job boards, or you could take a job as a waiter to help pay the bills while you look for something better. Millions of Americans fall into this category, but because they are working, they don’t get counted in the unemployment rate.
  • Employed Part Time—If you work at least one hour per week for at least $20 pay, you are counted as a part time worker, not as an unemployed worker. Whether you work one hour, ten hours, or 20 hours as a part-time employee, it’s still hard to pay the bills when you don’t have a full-time salary coming in.

The official unemployment rate touted in the media doesn’t take these worker groups into consideration, but there’s another rate that does. It’s known as the U-6 rate, and it calculates the percentage of workers who are unemployed and actively seeking work, those who want to work but have given up looking, and those who are working part-time for economic reasons. The U-6 rate for January was 11.3%, more than double the official unemployment rate.

The Shrinking Labor Force

While it’s true that the economy has made a positive shift and new jobs are being added every month, it’s not happening quickly enough to account for the drop in the unemployment rate. Part of that drop can be attributed to a smaller pool of workers. Retiring Baby Boomers and long-term unemployed workers have both reduced the total number of available workers being considered for calculation, contributing to the lower rates we currently see.

The good news is that during the month of January, over 700,000 people rejoined the ranks of workers actively seeking employment. While not all of them found jobs, it’s still an encouraging sign that Americans feel more confident as new jobs emerge.

Is It All a Lie?

Gallup CEO Jim Clifton rocked the online world last week when he published a blog post asserting that the current unemployment rate numbers are “a big lie.” Calling the numbers a lie assigns a nefarious motivation to reporting on a standard measurement that has been routinely used as an economic milestone for the past hundred years or so. There are actually six different unemployment measurements, each of which track different groups. These measurements range from the U-1, which tracks people who have been unemployed for at least 15 weeks, to the U-6, which includes all categories of unemployed including those who have part-time jobs.

While the standard unemployment rate of 5.7% may look better in the media than the U-6, it is also the measurement that has traditionally been used to represent the number of unemployed workers who currently have no work of any kind and are actively seeking employment. Americans need to understand what the numbers actually mean in order to gain a better grasp of the current state of the economy. But is it a big lie to say that unemployment stands at 5.7% and to rejoice that the current rate is nearly 5 percentage points lower than the rate at the height of the recession? Maybe not.

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