Why the Unemployment Rate Is Much Higher Than It Seems

COMMENTARY Jobs and Labor

Why the Unemployment Rate Is Much Higher Than It Seems

Sep 11, 2023 3 min read
COMMENTARY BY
EJ Antoni

Research Fellow, Grover M. Hermann Center

EJ Antoni is a Research Fellow in The Heritage Foundation’s Grover M. Hermann Center for the Federal Budget.
Over 700,000 people rejoined the labor force last month...less than a third of them were able to find work, and even fewer found full-time jobs. Narisara Nami / Getty Images

Key Takeaways

Accounting for this sleight of hand reveals an unemployment rate of over 6%, not the official 3.8%.

The number of Americans employed remains 5.5 million below its pre-pandemic trend. The survey also shows a depressed labor force participation rate.

Additional people are reentering the labor market, all while businesses are hiring less. That will drive the official unemployment rate much higher.

The labor market is nowhere near as strong as it appears. If that sounds surprising, it’s because the Biden administration is playing a shell game with unemployment numbers.

With millions of Americans missing from the workforce, the unemployment rate is being artificially depressed. Accounting for this sleight of hand reveals an unemployment rate of over 6%, not the official 3.8%.

To make sense of the numbers, we need to understand what led to today’s labor market conditions. The two-month-long recession in 2020 wasn’t a normal downturn caused by bad investment, misallocation of capital and/or overextension of credit. It was an artificial recession caused by the government forcibly shutting down a robust economy, ending a period of both fast growth and low inflation.

Tens of millions of people became unemployed in a span of two weeks. But when those artificial constraints were lifted, the labor market came back at the fastest rate ever and was quickly approaching its pre-pandemic trend. This is the opposite of a normal recession, where the labor market slowly accelerates into a recovery.

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President Joe Biden inherited an economy that was growing at a $1.5 trillion annualized rate and was adding an average of 1.4 million jobs per month after the government-imposed shutdowns. At the same time, inflation was only 1.4%, which is even below the Federal Reserve’s 2% target. But Biden’s anti-growth, big-government agenda slammed the brakes on the economy and the labor market.

After just 18 months of the Biden administration, inflation soared to 40-year highs, and the economy contracted for two consecutive quarters. Average monthly job growth has slowed 70%, and America remains 4.6 million jobs below its pre-pandemic trend.

The Bureau of Labor Statistics’ survey of households contains even worse data, showing the number of Americans employed remains 5.5 million below its pre-pandemic trend. The survey also shows a depressed labor force participation rate and a shocking increase in the number of people not in the labor force, relative to February 2020.

Before the government-imposed lockdowns, the number of people not in the labor force was about 95 million and was falling. Since June 2020, however, the level has been stuck around 100 million. That means millions of Americans left the labor market still haven’t come back, which explains why the ratio of employment to the population also shows a gap of 4.5 million people relative to its trend.

These millions of missing workers are important to remember because their absence skews many of the statistics used to gauge the health of the labor market. Imagine a labor force of 100 people wherein 10 are unemployed, giving an unemployment rate of 10%. If one of those unemployed people leaves the labor force, the unemployment rate drops to 9.1% (9 divided by 99).

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No jobs were created in that example, but the unemployment rate went down. That’s exactly what’s been happening in the real economy. Accounting for the millions of people currently excluded from the labor market reveals an unemployment rate between 6.3% and 6.8%, much higher than the official 3.8% rate.

To further illustrate the point, over 700,000 people rejoined the labor force last month, in part because families are having trouble making ends meet. Less than a third of them were able to find work, and even fewer found full-time jobs. Yet despite the increase in employment, the unemployment rate rose because so many more people are finally being included in the official number of unemployed.

Yet there are even more indicators showing weakness in the labor market. The number of job openings has plummeted to below its pre-pandemic trend, indicating softening labor demand which will put downward pressure on wage growth. At the same time, businesses are cutting hours and reducing the number of full-time employees.

As inflation continues to eat into family budgets and more households need a second income, additional people are reentering the labor market, all while businesses are hiring less. That will drive the official unemployment rate much higher and expose this shell game for what it is.

This piece originally appeared in MSN

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