The Real Jobless Rate

In the December 21, 2009 TIME magazine article "The Real Jobless Rate," Justin Fox explains why the unemployment rate may not be the best measure of labor market conditions.

At 8:30 on the morning of the first Friday in December, the Bureau of Labor Statistics (BLS) reported that the unemployment rate had fallen to 10% in November from 10.2% the month before. Hooray! Headlines heralded the unexpected drop. Stock prices surged. Enthused White House press secretary Robert Gibbs: "We're moving in the right direction."

By late morning, though, stocks were slumping. Commentators began to focus on concerns with the numbers. By the following Monday, Federal Reserve Chairman Ben Bernanke was warning that "we still have some way to go before we can be assured that the recovery will be self-sustaining."

So much for that fall in unemployment, huh? It was a telling reaction, indicative of the still gloomy national mood, the perceived fickleness of monthly economic indicators — and the diminished status of the unemployment rate as a statistic. Once the indispensable, largely unquestioned measure of the state of the job market, it is now treated with suspicion and disdain. With good reason, because the unemployment rate fails to accurately reflect just how bad things are out there.

Each month, interviewers contact 60,000 households — most by phone, some in person — and ask about the employment status of household members age 16 and over. Those who don't have jobs but have looked in the past four weeks are classified as unemployed. After some statistical adjustments to extrapolate the data from those 60,000 households to the total U.S. population, the number of unemployed is divided by the size of the labor force (employed plus unemployed), and there's your rate. Measured that way, unemployment still isn't as bad as it was at the lowest point of the 1981-82 recession, when it hit 10.8%. And it's nowhere near what it was in 1933, when the rate peaked somewhere around 25%.

This method of calculating unemployment was pioneered by the head of the Massachusetts Bureau of Statistics of Labor in 1878, and it has its merits. It's simple. It's straightforward. And it provides a pretty accurate count of those who really, really want jobs. But it also misses millions of people who may not be actively looking for a job but would happily take one if offered. Those ranks surely swell in a deep recession or during a time of economic turmoil that destroys entire job categories (like autoworker). The government's statisticians are aware of this, and since the 1970s the BLS has published broader measures of unemployment that include at least some of these people. In 1994 the broadest measure — which counts as unemployed those who have looked for work in the past year but not the past four weeks, plus part-time workers who would rather be working full time — was dubbed U-6 unemployment. During this recession, it has gotten far more attention than ever before. U-6 unemployment was at 17.2% in November, down from 17.5% the month before and up from 8.4% two years ago. These figures aren't strictly comparable with those from before 1994, but the New York Times has taken a stab at recalculating the earlier numbers — with help from the BLS — and estimates that U-6 unemployment peaked in December 1982 at 17.1%. Meaning this recession is worse.

Even these figures leave out people who say they want a job but haven't looked in the past year. Economist and gadfly John Williams, whose online newsletter Shadow Government Statistics has gained a big following lately, adds them in, makes a few tweaks and gets to 21.8% unemployment in November, down from 22.1% in October.

Such measures still rely on people's own assessment of whether they want to work. A BLS study a decade ago found that these self-assessments aren't all that reliable. So how about the simplest possible job-market measure, the employment-to-population ratio? Among Americans ages 25 to 54, it was at 75.1% in November, down from 80.3% in early 2007 and — with the exception of October's 75% — the lowest it's been since 1984. Because of the entry of women into the workforce, the ratio trended upward from the 1960s through the 1990s. If you look just at men ages 25 to 54, the picture is much more dire. Their employment-to-population ratio of 80.6% in November is the lowest since the BLS began keeping track in 1948. It's 4 percentage points lower than it was in the depths of the early-1980s downturn.

There are certainly other factors at play here besides just a tough job market — more stay-at-home dads, more rich loafers, more prison inmates. But it also may be a sign that these are in fact the worst times for American workers since the 1930s. Which helps explain why there was so little excitement about that drop in the unemployment rate to 10%.

The Effective Unemployment Rate is 17%.

In the October 12, 2009 article "Job losses mar recovery, create woes for Dems," Associated Press writer Tom Raum says "The recession may be over, yet job losses endanger recovery, create woes for Democrats." The article also includes an explanation of the effective unemployment rate. It includes discouraged workers (those that have stopped looking for work) and the underemployed (those who are not working as much as they want or need to work, such as part-time workers who want to work full-time). The current effective unemployment rate (17%) far exceeds the official unemployment rate (just under 10%).

WASHINGTON (AP) -- A distressed economy is widely blamed for President George H.W. Bush's re-election defeat in 1992, and a decade earlier, for the loss of 26 House seats in midterm elections by Ronald Reagan's Republicans. Yet in both instances recession had already ended or was winding down.

It's a point not lost on President Barack Obama's White House or Democrats headed into next year's midterm elections. The stock market may be up, U.S. service industries may be recovering, banks may be lending again and housing prices holding. But one major piece of the recovery puzzle is still missing: a brighter employment picture.

And that's bad news for the party in power, whether the recession is officially over or not.

Job losses are expected to continue at least into the middle of next year, likely driving the unemployment rate above 10 percent from 9.8 percent last month. It could take three or four more years for it to fall to normal levels.

The longest and deepest downturn since the Great Depression has claimed 7.2 million jobs since it began in December 2007. Analysts figure 750,000 more jobs could disappear over the next six months.

If you add in people who have stopped looking for work, or who are working part time when they want a full-time job, the unemployment rate is a whopping 17 percent, according to the Labor Department.

"If you've got an effective unemployment rate of 17 percent and if this goes on for any length of time, a year or more, then everyone's cushion will run out," said Republican consultant Rich Galen. "There are going to be serious implications, culturally and politically."

Galen said it's understandable that Republicans would use the state of the economy to pound Obama and Democrats who control Congress. Still, "it's not something we should either make fun of, be amused by or play politics with," he said.

Republicans already see a "jobless recovery." In a letter to Obama and House Speaker Nancy Pelosi, House GOP leaders asked, "Where are the jobs?"

Firing back, White House chief economic adviser Lawrence Summers defended the administration's efforts on the jobs front and wrote to the Republican leaders that Obama was "committed to not repeating the fiscal mistakes of the last eight years." House Minority Leader John Boehner, R-Ohio, said Monday said stimulus spending and other Democratic initiatives "are the wrong approach."

Another sign of continuing distress: Applications for Social Security retirement benefits are up 23 percent from last year, a much larger jump than in other recessions.

The surge is due to a rush of baby boomers filing for early retirement. Signing up for Social Security benefits as early as age 62 can be an immediate source of income for laid-off older workers, but it's also a troubling sign of the scarcity of jobs.

Despite some signs of recovery, the economy remains fragile. Consumer spending -- which powers two-thirds of economic output -- remains weak. Yet the widespread view among economists is that the recession has ended and that the economy grew in the just-ended third quarter.

So how can it be over if things are still so bad?

A recession is most simply defined as a period when the gross domestic product falls for at least two quarters. It had been doing that since the July-September quarter of 2008, although most economists believe the GDP has now reversed course and rose in the past few months.

The Business Cycle Dating Committee of the National Bureau of Economic Research is generally seen as the authoritative arbiter for dating U.S. recessions. It takes other things into account besides GDP, including employment levels, real personal income, industrial production, and wholesale and retail sales.

It dated the beginning of the current recession as December 2007 -- and hasn't yet called an end.

Economists agree that unemployment is a lagging indicator and can remain high long after a recession is pronounced over, continuing to inflict pain on those still out of work or worried about their jobs. That why it's hard for such workers to understand how the recession can be deemed over.

It's an important political dynamic as 2010 midterm elections approach.

At some point, continued job losses could easily push the economy back into negative territory, for a "double-dip" recession.

Hedge fund manager Doug Kass, founder and president of Seabreeze Partners Management, questions the ability of the economy to mount a self-sustaining recovery under continued elevated joblessness and wage deflation. "The consumer remains the Achilles' heel of the economy," he wrote recently.

Republicans claim continuing job losses signal a failure of the $787 billion Obama-driven stimulus legislation. "That is not what the American people were promised," said House Republican leader John Boehner of Ohio.

White House aides concede they missed the mark with their January estimate that the stimulus package would keep unemployment from rising above 8 percent. But they insist things would be far worse had the stimulus not passed.

White House Budget Director Peter Orszag suggested the stimulus package added 2 to 3 percentage points, on an annualized basis, to U.S. economic activity from April through September. "If the economy remains fragile, additional options will be considered," he said in a recent interview with The Associated Press.

Among measures being studied by the White House and congressional Democrats: extending and expanding a $8,000 tax credit for first-time home buyers due to expire at the end of next month; and tax breaks for companies that add jobs.

Rob Shapiro, an economist who was a top official in President Bill Clinton's Commerce Department, sees "substantial, continued job losses" for some time if the government doesn't take more aggressive steps to foster job growth.

In the meantime, the Obama administration should "prepare the American people to wait a while for real results," said Shapiro, now with a Democratic think tank called NDN.

The Effective Unemployment Rate

In the December 5, 2008 National Public Radio (NPR) story "U.S. Unemployment at 15-Year High," Jim Zarroli includes an explanation of the effective unemployment rate. It includes discouraged workers (those that have stopped looking for work) and the underemployed (those who are not working as much as they want or need to work, such as part-time workers who want to work full-time).

The U.S. economy shed jobs at a blistering pace in November, pushing the overall unemployment rate to 6.7 percent and putting new pressure on federal officials to approve another big stimulus package sometime soon.

Employers cut 533,000 jobs from their payrolls during the month, the worst decline since December 1974 and a much bigger drop than economists had predicted.

Companies also eliminated more jobs than first thought in September and October. That brings total job losses since the recession began in December 2007 to about 2.7 million, according to the Labor Department.

"Today's employment report reflects the difficulties in our economy. It is devastating when Americans lose their jobs, and many are worried about their future job security," said Commerce Secretary Carlos Gutierrez.

"These are really God-awful numbers. The economy's headed downhill and really the brakes are not working," said Sung Won Sohn, professor of economics and finance at California State University, Channel Islands.

Nearly every sector of the employment market lost jobs, including manufacturing (85,000), professional and business services (101,000), and leisure and hospitality (76,000). Unemployment rose for both adult women (5.5 percent) and adult men (6.5 percent).

"Right now I would take anything; I'd go down to $6 or $7 [an hour] just to have a job," says Ray Ross of Nashville, Tenn., who was recently laid off from his job as a security guard. His former employer has put him on call, but he isn't getting much work.

The retail sector lost 91,000 jobs, with auto dealers alone down by 24,000, underscoring the way Detroit's troubles are filtering through the broader economy. The drop comes in a week when officials of the big U.S. automakers are on Capitol Hill seeking financial assistance, and it is likely to make it harder for Congress to turn them down.

As high as it appears, the 6.7 percent unemployment rate actually underestimates the number of people hurt by the declining jobs market, because it doesn't include people who have given up searching for work or part-timers who would like to work full time, Sohn said. The report says more than 400,000 people left the labor market this year because they believe no jobs are available, he said.

Forty-eight-year-old Edward Stewart Jr., of Kansas City, Mo., has been subsisting on day jobs and occasional temporary gigs, but he would prefer to work a full week.

"Right now, I'm searching the Web and trying to make some phone calls and trying to get some work for like a janitorial service maybe, whatever comes up," he says.

In addition, the Labor Department estimates that about 600,000 workers have simply stopped looking for jobs, up from about 259,000 a year ago.

When these two groups are included, the effective unemployment rate is actually much higher than it appears, about 12.5 percent, Sohn says.

November's big drop puts new pressure on the incoming Obama administration and Congress to approve an economic stimulus package as quickly as possible. The president-elect has talked about a plan to create 2.5 million new jobs, at least in part by funneling money to the states to pay for large infrastructure projects.

"The jobs picture painted today is staggering, and it should be all the evidence Washington needs to act swiftly and decisively to shore up this economy," said Sen. Charles Schumer (D-NY).

Bush administration officials tried to sound a more optimistic note, saying the financial rescue package put into place by the Treasury Department would ultimately help the job market. U.S. officials have taken a number of steps to try to stabilize the financial system, such as buying stock in major banks and guaranteeing certain kinds of securities.

"it's going to take time for all the actions we've taken to have their full impact, but I am confident that the steps we're taking will help fix the problems in our economy and return it to strength," said President Bush, meeting with reporters at the White House today.

"My administration is committed to ensuring that our economy succeeds, and I know that the incoming administration shares the same commitment," he added.

The gloominess of the report sent stock prices down sharply early in the day, but they later rebounded. The Dow Jones industrial average rose by 259 points, finishing at 8635.