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Practical Economics:
Economic Indicators - Unemployment Rate
Is the Unemployment Rate in America in May 2012 going down?
Short answer - YES!
But is this answer significantly positive for the average American?
Short answer - NO!
A Contradiction?
Why do I state this apparent contradiction? Without a doubt, one of the most powerful indications of the health of the American macro-economy is whether the workers in America's workforce are employed or not. So important is this issue that a previous successful presidential candidate sailed to victory over an incumbent by asking the well-known question, "Are you better off than you were 4 years ago?" Let us examine the numbers behind the April 2012 8.1 % Unemployment Rate calculation, in order to draw a significant conclusion.
The Bureau of Labor Statistics (BLS) has not significantly changed the calculation methodology of the Unemployment Rate, issued on the first Friday of every month. The Unemployment Rate is an extremely important economic indicator revealing useful information about the health and direction of the American economy.
However, an examination of the context of today's calculation is revealing. I have updated the employment chart that I published in my 2/1/2012 newsletter. Below are the updated numbers, straight from the US Government, used to calculate the rate.
Bureau of Labor Statistics (BLS).
A B C D E
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2007
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231,867,000
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153,124,000
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146,047,000
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4.6%
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2008
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233,788,000
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154,287,000
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145,362,000
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5.8%
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2009
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235,801,000
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154,412,000
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139,877,000
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9.2%
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2010
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237,830,000
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153,889,000
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139,064,000
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9.6%
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Dec-11
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240,584,000
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153,887,000
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140,790,000
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8.5%
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Apr-12
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242,784,000
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154,365,000
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141,865,000
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8.1%
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Column A
= Year or Period
Column B
= Non-institutionalized Americans in Civilian Population ages 16 - 65
Column C
= American Civilian Labor Force as measured
Column D
= Number of Americans Reporting They Are Employed
Column E
= Calculated Unemployment Rate (Column C - Column D) / Column C
Today's Reality
The employment numbers in America as of April 2012 are actually worse than they were four months ago. May I explain? Since the recovery began in 2009, the size of the workforce in the American economy has stayed about the same at 154 million (Column C above). Normally, this number is used as the denominator in the calculation of the current rate (Column E above).
But something extraordinary is going on. The non-institutionalized Americans among the civilian population ages 16 - 65 has grown by around 7 million eligible workers, from 236 million to 243 million, (Column B above) in the almost three years since the recession began in 2009, calling into question the appropriateness of using
an unadjusted measure of self-identified people, uncorrected for today's reality.
Today, there are close to 5 million people who seem too discouraged to even look for work, which designation takes them out of the calculation of the traditional Unemployment Rate, as these people are not included in the workforce tabulation (Column C)!
For instance, if we compare the 2008 workforce in America to the total eligible Americans at that time, then that percentage is 66% (D divided by B above) when the reported Unemployment Rate was 4.6%.
As of April 2012, that same calculation shows only 63.6% of eligible Americans, which indicates America added around 7 million eligible workers in the last few years who chose NOT to report they were looking for work, therefore are NOT counted as part of the workforce. Is it meaningful to ignore these real people in making the Unemployment Rate calculation?
Today, the Unemployment Rate reported by the BLS is 8.1%, even though there are still 3.5 million fewer people employed then there were before the recession began in 2009! (Column D April 2012 row versus Column D 2008 row).
Conclusion - A Better Number
Alternatively, we choose to use a calculation based on the historical utilization factor of 66.3% of the total eligible Americans to be counted in the workforce, which is the average utilization rate of Americans in the workforce, for the 10 years preceding the recession, to calculate a more meaningful Unemployment Rate.
This calculation provides us with a more consequential definition of workforce (column C above) to use as a denominator in the Unemployment Rate calculation. Instead of the rate dropping from 8.5% in December of 2011 to 8.1% in April of 2012, the real Unemployment Rate increased from 11.7% to 11.9%.
These numbers and my conclusions come straight from analyzing the BLS employment tables. We are looking at the same numbers from the longer-term perspective of trying to understand why over 70% of Americans recently polled answered they still thought America was in a recession, instead of the political expedient short-term view we hear constantly hyped by the mainstream media!
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