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Fallacy Friday: The Unemployment Rate

Fallacy Friday: The Unemployment Rate

The last Fallacy Friday focused on the improper logic and economics surrounding the minimum wage. This week, let’s take a look at a fallacy of deception: the deceptiveness of the current unemployment rate.

Today, the Bureau of Labor Statistics (BLS) announced that the unemployment rate for March dropped to 7.6 percent. This is the lowest it’s ever been during the Obama presidency. Naturally some would see this figure, and the progressively decreasing rates before it, as a vindication of the administration’s tax/borrow and spend policies. But what if I told you that the decline in the unemployment rate over the past few months is actually an indicator that things are getting a lot worse?

I’m sure there will be plenty of disregard paid to such an assertion as some will write it off as just another right wing attack at a president and administration that can’t seem to do anything right.

Personally, I wish it was that simple. The reality is that we are seeing some truly troubling statistics suggesting a situation that the unemployment rate formula and rules can’t effectively illustrate.

Let’s dissect the situation starting with the unemployment rate itself. The ‘official’ unemployment rate cited by the media is the U-3 rate issued by the BLS every month as a part of their measures of labor utilization table, along with 5 other rates (U-1 through U-6).

However the U-3 essentially only measures the percentage of people who are out of a job but are actively seeking to find one. These people, while not employed in any traceable way, shape, or form, are still considered to be participating in the labor force, and thus are counted in another BLS measure: the Net Labor Force Participation Rate.

This rate measures all those working and those actively seeking employment and it currently sits at 63.3 percent. Yet this figure has also been dropping over the past several years. In fact when President Obama took office, the labor force participation rate was 65.7 percent.

On the surface, an unemployment rate that has dropped to 7.6 percent looks positive; however when the U-3 official unemployment rate and the labor force participation rate begin to decline in conjunction, it becomes a very bad sign for the overall economy.

It’s important to remember that the U-3 official rate is only counting people that are encouraged enough to be seeking employment. What it doesn’t count are all the people that have simply given up hope. This is captured by the drop in the participation rate.

So let’s do some math and discover an unemployment figure that captures the plight of the discouraged worker.

The current unemployment rate of 7.6 percent was calculated as such: 
The participation rate of 63.3 means that 155.028 million Americans are working or actively seeking work. Of those people, 143.286 million have some form of a job.

142.286/155.028 = (roughly) .924

Thus 92.4 percent of those participating have jobs and the difference of 7.6 percent do not.

But let’s replace the current participation rate, i.e. the eagerness and ability to find work, with the one from a little over 4 years ago, when President Obama took office. But first we’ll have to do a little math to account for population changes.

We know that the number of employed Americans, 143.286 million, is 92.4 percent of the labor force. To find out what percentage that is of the population as a whole, we simply multiply .924 by the current participation rate of 63.3 percent.

.924 x 63.3 = 58.5

So 58.5 percent of all Americans have jobs. To figure out what the U-3 official rate would be if the BLS considered all those who have given up looking for work since January of 2009, we simply divide the percentage of employed Americans by that month’s participation rate, 65.7.

58.5/65.7 = (roughly) .8904

Using these figures we see that a more accurate employment rate is about 89 percent, and thus a more accurate unemployment rate is 11 percent. Further, we can see that the employment situation in this country, a tell-tale measure of overall economic health, remains dire and seems to have grown to an extent that current statistical analysis of unemployment appears to not have anticipated.