The question is how accurately does the unemployment number reflect the true state of the US labour market?
To understand this, we need to grasp how the unemployment numbers are compiled.
The Bureau of Labor Statistics (BLS) calls around 60,000 households (out of total of close to 115 million) covering 110,000 people, every month to find out who is and who isn’t working.
Process driven
From responses to various questions, the BLS will determine whether or not a person is ‘marginally attached to the labour force’. To be counted as marginally attached to the labour force, individuals must show some degree of labour force attachment by looking and being available for work.
‘Discouraged workers’ are those who are not looking for work because they don’t believe there are any jobs, were previously unable to find work, lack the necessary skills or experience to do a job, or face some form of discrimination from employers such as being too young or too old.
If someone is in either of these two groups, they are not included in the labour force. They are not counted in the official unemployment rate, the rate that everyone uses to understand how well the Fed is doing at achieving its dual mandate of stable prices and full employment. This official unemployment rate – the total number of unemployed as a percent of the labour force – is known as U3 and on this measure it appears the unemployment rate is now trending lower.
To get the full picture of what is going on in the labour market, the BLS produces a broader measure of unemployment known as U6 that basically includes marginally attached and discouraged workers in the unemployment calculation. It also includes those people that are working part-time but would rather be full-time.
On this measure, the US labour market appears to be deteriorating once more, and the unemployment rate as calculated by this measure is 16.5%. This suggests around 11.4 million Americans are marginally attached or discouraged workers (from 2001-2008, the number of marginally attached or discouraged workers was on average 5.8m people).
Imperfect system
According to the BLS, 11.4 million Americans do not have an income, do not pay income tax, and do not contribute producing goods and services. Indeed, almost 15% of Americans (45.8m) are now on food stamps. This is a substantial drag on economic growth.
According to the BLS, the American workforce (employed plus unemployed people) has actually shrunk since October 2008. It doesn’t seem to make sense, given most estimates tend to suggest the US population is growing at 1% per year, in part due to immigration. We would expect labour force growth to slow due to the retiring cohort of baby boomers and peak in the participation of women in the labour force. But it shouldn’t be negative.
The reason it is negative is because the BLS doesn’t count those who are marginally attached or discouraged from entering the labour force (as shown above, around 11.4 milion people). This has the result of reducing the size of the labour force, resulting in a lower unemployment rate percentage.
This is why the official unemployment rate is much lower than the broader U6 measure and has actually been falling. More and more people are becoming so disenchanted with their job prospects that they have simply stopped looking for a job.
Despite the idiosyncrasies in calculating the unemployment numbers, they are the best we’ve got. If the Fed is really serious about targeting the unemployment rate then it should have a good hard look at including those people who are underemployed, discouraged or marginally attached to the labour force. The official headline rate – which gets the most coverage in the financial community – overstates the current health of the US labour market.
