The Unemployment Rate is Misleading. Here’s Why

The Bureau of Labor Statistics (BLS) defines the unemployment rate as the percentage of unemployed people who are currently in the labor force. But who’s part of the labor force?

To summarize, you’re employed if:

  • you worked for pay or profit during the previous week;
  • you did at least 15 hours of unpaid work in a business or farm operated by a family member with whom they live;
  • you were temporarily absent from regular jobs because of illness, vacation, bad weather, labor dispute or various personal reasons, whether or not they were paid for the time off.

You’re unemployed only if:

  • you didn’t have a job during the survey reference week, made at least an effort to find a job during the prior four weeks and were available for work (unless temporarily ill);
  • you were laid off or furloughed and given a date to return to work or given an indication they will return to their job within six months. (You don’t need be looking for work to be classified as unemployed in this case.)

If you don’t fall into either one of these categories, you’re not part of the labor force. This leaves out a ton of relevant people. According to the November 2020 data, nearly 6.8 million Americans who said they want a job but don’t have one aren’t considered a part of the labor force. As a result, only 10.7 million Americans are classified as unemployed. This means that 39% of people who aren’t working aren’t part of the labor force. When you include these people the unemployment rate jumps from 6.7% to 10.0%. A 6.7% unemployment rate may not look that bad but it’s very misleading.

Before 1993, you were considered unemployed if you weren’t working. In 1994, under the Clinton Administration, the BLS changed how it calculated the levels of unemployment in the U.S. This is why it’s not fair to compare unemployment rates from different eras because the calculations are different. Therefore, when you compare the current unemployment rate with rates prior to 1994, you’re comparing apples and oranges.

Americans were told for months they weren’t in a recession despite millions losing their jobs on a monthly basis. Now, as in every recession, the public is being told they’re coming out of the recession, yet the same practices are still in place. Whether the president is white or Black, Republican or Democratic, certified or not, the outcomes are usually the same.

Since 1956, the unemployment rate in September of presidential election years has been lower than the rate in December of the previous year in 11 of the 17 elections. (Ironically, the incumbent party has lost all six elections where the unemployment rate rose or stayed level during that period.) This probably means that incumbents know a lower unemployment rate can help their party get re-elected.

This also means the unemployment numbers may be manipulated. For example, as millions were fired, laid off or furloughed during COVID-19, the BLS has admitted that government household survey takers mistakenly counted about 4.9 million people as employed, even though they were unemployed. This lowered the unemployment rate from 19.5% to 14.7% in April 2020 and from 16.1% to 13.3% in May 2020. The official response was that the government doesn’t correct its survey results for fear of the appearance of political manipulation. But in an election year, this looked suspicious.

Never focus on the unemployment rate as a true economic indicator. The numbers are grossly understated due to undercounting and possible manipulation. Now, another 12 million American workers will lose their unemployment benefits at the end of the year without congressional action. This will leave many without income when protections for renters, homeowners and student loan borrowers are due to end. Most, if not all, of these people will fall out of the labor force, which will lower the unemployment rate. With jobless rates surging almost 20% this week, it will be interesting to see what the December unemployment rate will be. Either way, it doesn’t matter what financial networks and correspondents tell you. It doesn’t matter what the government stats say. What matters is how you bounce back.

 





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