Truth of Unemployment Numbers

     Many statistics come out of Washington D.C. on a regular basis that determine the health of the countries economy and are a driving force for Wall Street.  The Unemployment numbers that come out every month is one of the biggest since it is an index that is released every month vice every quarter like GDP estimates.  This is also the index that many politicians especially the president use to make a claim that their policies are or are not working when it comes to job creation and growth.  Many in the general public get excited and feel at ease when they hear that the unemployment rate has dropped; the issue with this is that for the most part the general public does not understand how the unemployment numbers are actually calculated and how easy it is to skew the numbers.  Granted any numbers can be skewed, statisticians can make any number say what they want it to say, and lets face it economists are nothing more than statisticians that use a little bit of sociology and deal with money (and yes I realize that while I’m not a true economist yet, I do the same thing). 

     Unemployment numbers are calculated via surveys that are conducted by the Census Bureau.  These surveys are supposed to be non-partisan but sometimes (most of the time), they aren’t.  Every month the Census Bureau contacts 60,000 households and asks them a series of questions regarding various factors, such as how many people over the age of 16 live in the house (any individual over the age of 16 is considered “Working Age Population”); how many have worked in the past week, how many have looked for a job in the last 4 weeks, and so on.  They also ask questions pertaining to consumer confidence and the consumer price index.  On the surface to many people, this seems like it could be an accurate representation of the country as a whole, and while that could be true it’s not necessarily very accurate.  The Census Bureau falls under the Department of Commerce, which is in the Executive Branch of government, headed by the President.  This is where partisan politics comes into play.  Lets say that the President is in a hard spot, maybe a scandal, maybe an upcoming reelection.  In order to make the numbers look better, the census bureau can decide to call households that live in suburban America, places where historically unemployment hasn’t been as high and not call as many households located in the inner city where unemployment is a larger issue.  This would result in a “lower” unemployment number than the previous month and the mainstream media would praise the government for doing something amazing; when in actuality nothing was really accomplished. Once the survey’s are conducted the numbers are handed over to the Bureau of Labor Statistics (BLS); the BLS is responsible for breaking down the numbers and making the calculation, but remember they do not truly know how accurate the numbers are because the numbers were gathered by another agency.   

     Looking at how the numbers are actually calculated can cause some to raise their eyebrows and ask the question, how does this even make sense?   There are several sets of numbers that have to be broken out in order to come up with the calculations:

Category	Definition
Working-Age Civilian Population	Anyone in a household over the age of 16 not in the military.
In The Labor Force	Either currently working or has looked for work in the past 4 weeks.
Employed	Worked at least 1 hour in the last week
Unemployed	Not working but has looked for a job in the past 4 weeks.
Not in the Labor Force	Has not looked for a job in the last 4 weeks.

     While the categories seem to be straightforward, they tend to understate statistics, there are 3 groups that are vastly misrepresented within the survey:  

     Part-Time workers are classified as “working” but most are not working enough to support themselves or families and thus are still relying on government assistance, yes they’re working and the unemployment number goes down because of it, since they’re still relying on the government for help with housing and food, how exactly has that helped improve the economy?

     Under Employed, those that have an advanced degree say in engineering, yet are working as an office assistant because that is the only job they could find.  In Economics, we talk about “Full Potential” when it comes to things such as the economy, GDP, and unemployment.  Full Potential means that everyone is employed in a position that is commensurate with his or her education and/or experience.  In the case of the under employed worker they are not at their full potential and therefore should not be classified as truly employed. 

     Discouraged Workers, are those that are unemployed and more than likely have been for an extended period and have just given up on looking for employment, because they feel there is nothing out there for them.  Given the BLS definition of “In the Labor Force” vs “Not in the Labor Force”, they are not in the labor force thus causing the unemployment number to drop, all because they haven’t looked for a job in the past 4 weeks.  This could be caused by any number of reasons, they were too sick to work or maybe their spouse works and the family decided to go on a vacation.  No matter the reason, this group of people should still be counted as in the labor force in order to show a truer unemployment number.  I could go on and on about unemployment benefits and changes in the numbers but I will leave that for another post probably in February when I can prove a theory that I have.

     Here is a graphic that illustrates how the percentages are calculated (I figured it would be easier to use picture than try to explain in words):

     I hope this helps to illustrate the formulas used for the unemployment numbers, but more than that I’m hoping that people will take the numbers that come out of D.C. with a grain of salt.  It is not hard to make the numbers say whatever will help the current administration gain approval rankings. 

     Also remember that in order to claim unemployment benefits you must be actively looking for a job, with the recent cut in unemployment benefits I’m almost willing to be that all of a sudden the unemployment numbers will drop and the government and mainstream media will praise the president for doing wonderful things to spur job growth, when in all reality all that has happened is people have moved from one category to the other, thus lowering the percentage.