Does the official unemployment rate reflect underlying reality of joblessness?

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By Hao Li: Subscribe to Hao's RSS feed

September 2, 2010 2:11 PM EDT

The U.S. unemployment rate stood at 9.4 percent in July 2009, then reached a high of 10.2 percent in October of that year, and subsequently drop backed down to 9.5 percent in June and July 2010, according to official government figures.

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But how much did the labor market really recover from last October and how accurately does that 9.5 percent figure reflect reality?

Accuracy in Reflecting Reality

The official government unemployment rate counts people working part-time for economic reasons as "employed." It also excludes from the workforce people who gave up looking for jobs because they believe no opportunities are available for them.

The government's "U6" number, which accounts for the two cases mentioned above, was at 16.5 percent in July. However, other measures put the jobless figure is even higher -- for example, TechnoMetrica, a private firm that does its own polling and calculations, reports that the unemployment rate is at roughly 22 percent.

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How Does the Job Market Compare to Last July?

According to official employment calculation methods, there were 139.82-million employed workers in July 2009 versus 138.96-million in July 2010, so there are about 860,000 fewer employed individual. The unemployment rate is about the same as last year only because the labor force also shrank by about 800,000.

If the over-16-years-old population in the U.S. declined, then a shrinking labor force would make sense. However, the population actual grew by 2 million.

So how did the labor force decline while the population grew?

Jobless people in the U.S. are counted as part of the labor force – they are categorized as 'unemployed' – only if they are actively seeking jobs. If they give up looking for work for reasons like retirement, giving up hope of finding employment, family reasons, focusing on education etc., they are no longer considered part of the labor force. So from last July, more jobless people have decided not to look for jobs, and that is how the labor force shrank while the population increased.

Michael Englund, chief economist at Action Economics, said it is not normal for the labor force to trend downward for such a long time. There is a risk in any given month for the unemployment rate to “pop” if a substantial number of people were to suddenly re-enter the labor force, he said.

In July 2009, 65.4 percent of the population was in the labor force. In July 2010, that figure had edged down to 64.6 percent.

So, if 65.4 percent of the population was in the labor force in July 2009*, then the unemployment rate would actually be 10.7 percent. Assuming the January 2009 labor force-to-population ratio, the unemployment rate would actually be 11.0 percent in July 2010.

*Assuming the 65.4 percent figure, there would be 155.67 million people in the labor force in July 2010. This adds about 2.1 million people to the official labor force figure. These 2.1 million people are unemployed – remember those not included in the civilian labor force are unemployed – so the unemployed population would be 16.7 million. 16.7 / 155.67 = 10.7 percent.