Why the Unemployment Rate Is Not What We Should Be Looking at

David Leonhardt:

Unemployed, and Skewing the Picture: [Carroll Wright's] survey asked town assessors to estimate the number of local people out of work. Wright, however, added a crucial qualification. He wanted the assessors to count only adult men who "really want employment."... Wright is the father of the modern unemployment rate.

This Friday, the government will release the latest employment report.... Whatever the survey ends up showing, however, you can be sure of one thing: Politicians will be quick to point out that joblessness remains low by historical standards. "Five percent is still a low unemployment rate," Ed Lazear, the chairman of President Bush's Council of Economic Advisers, said recently.... Statistically, all this is true enough. But it's also deeply misleading.

Over the last few decades, there has been an enormous increase in the number of people who fall into the no man's land of the labor market that Carroll Wright created 130 years ago. These people are not employed, but they also don't fit the government's definition of the unemployed -- those who "do not have a job, have actively looked for work in the prior four weeks, and are currently available for work."

Consider this: the average unemployment rate in this decade, just above 5 percent, has been lower than in any decade since the 1960s. Yet the percentage of prime-age men (those 25 to 54 years old) who are not working has been higher than in any decade since World War II. In January, almost 13 percent of prime-age men did not hold a job, up from... just 6 percent in 1968.... [P]rime-age women.... About 27 percent of them don't hold a job today, up from 25 percent in early 2000.

There are only two possible explanations for this bizarre combination of a falling employment rate and a falling unemployment rate. The first is that there has been a big increase in the number of people not working purely by their own choice. You can think of them as the self-unemployed.... second possible explanation -- a jump in the number of people who aren't working, who aren't actively looking but who would, in fact, like to find a good job -- is less comforting. It also appears to be the more accurate explanation.

Various studies have shown that the new nonemployed are not mainly dot-com millionaires or stay-at-home dads... [but] those who have been left behind by the economic changes of the last generation... replaced by technology... gone overseas.... These nonemployed remain a distinct minority of the population. But the growth in their numbers is one reason that overall wage growth has been so weak lately.... [T]here is no doubt that the unemployment rate is a less telling measure than it once was. It's simply no longer the best barometer of the country's economic health. A truer picture can be found elsewhere, by looking at compensation growth, for instance, or to changes in the percentage of the employed...

Comments

[Jessica]

Is it possible that an increase in self-employment or off-the-books employment explains part of the divergence between the unemployment and employment numbers?

[Steven Palmer Peterson]

How do these assessments treat people in college?

Up until the last couple decades having a cutoff at 25 would pretty much cover college students, but now there's a lot more people pursuing post-graduate degrees of various kinds and who aren't working while they do so. Would a graduate student receiving a stipend count as employed?

[Richard Cheney]

Silly Brad! All those people are getting rich off their eBay professions buying and selling widgets from China to those of us with electronics addictions! That's a source that didn't even exist 10 years ago. Four hundred thousand people make some money trading on eBay. This is what is great about free trade!

[save_the_rustbelt]

Worse yet, there is no real measure of UNDERemployment, the worker who lost a good job and now has a lousy job (low pay, low benefits, low security).

Those other folks? We call them "Lawnmower Entrepreneurs." They also shovel snow and sell firewood. Are pencils and apples next?

Blue collar wages will fall until they hit the minimum, and Chinese wages will come close to that level. Our government, given cover by economists, is doing this to us.

[trotsky]

"But the growth in their numbers is one reason that overall wage growth has been so weak lately."

This seems to have the cause and the effect reversed.

[Jon]

In what sense 'should' we not be looking at the unemployment rate?

The unemployment rate, as the sum of structural and cyclical unemployment, is a measure of the current friction (coordination failure) in the labor market. Thus, it is a good measure of our position in the business cycle.

By contrast, hidden unemployment (or rather, levels of labor market participation) depend on fundamental conditions in the labor market such as wealth, preferences over consumption and leisure, and employment opportunities.

Changes in labor market participation can tell us a lot about trends in these conditions. However, we should keep in mind that the two measures are separately useful.

We 'should' be looking at both, and using them each to inform policy.

[Joe]

I see two factors that might substantially explain this anomaly: (1) a growing trend in the share of retiree-population in total adult population and/or (2) an increasing fascination for education among the youth. (People in both groups are not looking for work and are therefore taken off from the labor force and hence from the calculation of unemployment rate.) Just guessing.

[pgl]

"Is it possible that an increase in self-employment or off-the-books employment explains part of the divergence between the unemployment and employment numbers?"

Huh? Both are from the household survey. The unemployment rate basically captures the ratio of the employment-population ratio and the labor force participation rate. The latter had risen a lot over time but has retreated a bit under Bush43. But the self-employment angle is at best part (not all) of the divergence between the payroll v. the household survey.

[raboof]

Brad, people were telling you this six years ago.

[derrida derider]

This is old hat to labour economists - it's only macroeconomists who have been a bit slow to understand it, as raboof implies :-)

A far better stat to look at for cyclical effects is a broader measure of labour market slack - labour underutilisation. This includes all those "marginally attached" (ie those not actively looking for work but who would readily take a job if the right one turned up), as well as all those working part time but who say they want to work more hours (not a big issue in the US where part-time jobs are relatively rare, but it is in some other countries).

Most industrialised countries have such a series (I'm not sure if the US does) but they are not standardised in the way the unemployment rate is, so cross country comparisons are hard. It's one of the few useful things the ILO could do - define a benchmark definition of labour underutilisation in the same way they did for unemployment (there they basically copied the US' definition).