March 24, 2004

March 24, 2004 | WebMemo on Jobs, Jobs and Labor Policy

Will the Real Unemployment Rate Please Stand Up?

(updated on April 2, 2004, with data from the BLS March Employment Situation release)

 

Big government types assert that the economy cannot recover without the government's help. The anemic, sluggish labor market is their main piece of evidence when arguing for more benefits for the poor, more taxes on the rich, higher minimum wages, and protection from international trade with impoverished Third World countries. The unwelcome sunshine on their gloomy parade for big government is the low rate of unemployment, currently at 5.7 percent. 

 

Even pessimists know that 5.7 percent unemployment is close to what economists consider the "natural" rate or the non-accelerating inflation rate of unemployment. As a metric, the rate of unemployment is comparable to body temperature in that a sudden spike upwards is a powerful signal of ill health. But after a fever breaks, coming back to the normal level is healthy, and going much lower has risks of its own. 

 

What is the Unemployment Rate?
Instead of arguing that the unemployment rate could or should be lower, critics are questioning the integrity of the way the rate is calculated. The basic idea is that the economy is so bad that workers are not even in the labor force, and so the unemployment rate today is not comparable to the rate five or ten years ago. For example, on March 19th, a Washington Post editorial claims that the unemployment rate is "above 7 percent" if "you add in discouraged workers." 

 

The Post has been misinformed. The authoritative data on unemployment come from the Bureau of Labor Statistics (BLS), specifically table A-12 of the household survey, which calculates several different unemployment rates. Each is based on a nuanced definition of who is actually unemployed (explained here: http://www.bls.gov/webapps/legacy/cpsatab12.htm). Unemployment peaked in June 2003, and that peak is lower than the level of unemployment in the early 1990s for all measures of unemployment.

 

The rate of unemployment that includes discouraged workers is known as "U-4." It is currently 6.0 percent, which is 0.3 percent higher than the official rate, not the 1.4 percent gap imagined by the Post. Actually, the present gap between U-4 and the official unemployment rate is quite close to the historical average of 0.23 percent.

 

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As a refresher, the official rate of unemployment in March, a.k.a. "U-3," was calculated by dividing the 8.35 million unemployed Americans by the 146.65 million people in the labor force for a ratio of 5.695 percent0. Paul Krugman's March 12 column in the New York Times is typical of attempts to explain away the low rate of 5.6 percent, saying it is "entirely the result of people dropping out of the labor force."

 

A fine argument, if only it were true. Chart 2 shows what is really happening. The household survey reports a surge in the size of the labor force (2.21m) and total employment (1.89m) since the end of the recession in November 2001 (these numbers are from the BLS, at /static/reportimages/CACF3BE7EFCC0A8995218D988AEDD522.pdf).

 

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Discouraged Workers?
So, what is the difference between discouraged workers and other marginally attached workers? As technically defined by the BLS, discouraged workers think that no work is available, and so they quit looking. In sharp contrast, other "marginally attached" workers think work is available but are not able to actively seek work for reasons such as child-care and transportation problems. They are specifically not discouraged, and it is inaccurate to describe them as such. It is even more inaccurate to describe every home-schooling parent and sole proprietor as jobless, but that is another story (see http://www.heritage.org/Research/Labor/CDA04-03.cfm).

 

Those are the facts. But this is a political season, and often facts can't find their way into the headlines. Even so, anyone who is genuinely concerned about the U.S. economy should know that its temperature is fine. There are fewer discouraged workers as a percentage of the labor force today than in 2003, but also in comparison to 1994, 1995, and even 1996. Despite the fondest hopes of pessimists, today's low unemployment rate is the real deal.

 

Tim Kane, Ph.D., is Research Fellow in the Center for Data Analysis at The Heritage Foundation.

About the Author

Tim Kane, Ph.D. Visiting Fellow
Center for Trade and Economics (CTE)

Related Issues: Jobs, Jobs and Labor Policy