Why the US Unemployment Rate is a Nonsense Number

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The US media are agog this morning with news that the unemployment rate has dropped to 4.3%, “the lowest in 16 years.”

Don’t cheer too quickly.

The US doesn’t calculate unemployment the way other countries do. The percentage is based not on total working-age population but on the number of people who are working or “actively looking for work.” In plain English, if you don’t have a job and you haven’t gone on a job interview in the last week, you’re not unemployed.

That definition of unemployment is consistent with the requirement that states have for collecting unemployment insurance. However, if you are out longer than 26 weeks, state unemployment insurance ends and there’s no point in bothering to report that you’ve looked for work in the last week. So you fall into that odd category of “not working and not unemployed.” People in that odd category are excluded from the calculation of the unemployment rate.

So, the way the US does it, you can be unemployed and not counted as unemployed.

That’s how you can have what actually happened this week:

  • The number of people working dropped
  • The new number of new jobs created by employers was “unexpectedly” low
  • The unemployment rate dropped.

The Wall Street Journal noted the anomaly in the numbers. In a truly tight labor market, one would expect to see wages increasing. However, annual wages increases have stayed around 2.5% despite the declining unemployment rate. The job market simply isn’t as good as the unemployment rate might lead you to believe.

In fairness, on the other side, we have people who work for cash that they don’t report to the IRS. That’s the “gray economy.” It includes people who report only a fraction of their income as well as those who report no income (and might even collect unemployment). It also includes income from illegal activities. We don’t know how large the gray economy is, but there is no question that making ends meet on what most states pay for unemployment is next to impossible.

Why would the US track a number that doesn’t mean anything? One possible explanation has to do with the myth that there are people who are lazy and would rather struggle on unemployment than have a decent job. If such people exist, you wouldn’t want to count them as part of the labor force. However, I’ve never actually met anyone like that, have you?


Sources:

  • Eric Morath, “Unemployment Rate Falls to 16-Year Low, But Hiring Slows,” The Wall Street Journal, 2 June 2017.
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