A Better Way to Track Unemployment

August 29, 2012

Reports of lower unemployment rates are often misleading because they don't take into account several factors such as discouraged workers -- those that have not looked for work in the past four weeks - and people whose unemployment benefits have dried up, says R. David Ranson, a senior fellow with the National Center for Policy Analysis.

Recent encouraging reports about the reduction in the unemployment rates are the result of misleading definitions of what unemployment is. A better avenue of calculating the rate of employment would be to check the ratio between the employed and the population of the working age. The complement of the ratio between the employed and the working age population, called the not-employed rate, is equally objective, and supplies a transparent indicator of improving or deteriorating labor market conditions. The not-employed rate also includes those that are in the military, full-time home care-givers, the retired, those in school, etc.

  • Nearly 60 percent of the civilian population of working age was employed as of June 2012.
  • However, 41.4 percent of the population was not-employed as of June 2012.
  • Before the recession, the not-employed rate was at 37 percent, meaning the not-employed rate must drop nearly 5 percentage points to justify a claim of complete recovery.

The recovery of the U.S. labor market is even slower than many people are aware. The decline in the headline unemployment rate from 9.1 percent a year ago to 8.2 percent in June 2012 sounded encouraging. But it may exaggerate the improvement. Indeed, the next month the unemployment rate rose slightly to 8.3 percent. Interpretation of this headline unemployment number is clouded by the exit of unemployed people from the labor force as their unemployment benefits have run out, as well as by a general "discouragement" of would-be workers. Definitions of employment status such as "unemployed," "discouraged" and even the "labor force" itself are soft data -- subjective and fuzzy.

Source: R. David Ranson, "A Better Way to Track Unemployment," National Center for Policy Analysis, August 2012.

 

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