What’s the Real Unemployment Rate?

A man in Florida holds up a sign looking for work. (Getty Images)

Unemployment fell to a five-year low of 6.7 percent in December, yet employers added just 74,000 new jobs during the month — the lowest monthly payroll increase in nearly three years.

So how does the “unemployment” number fall despite such weak job growth?

In simple terms, the U.S. Department of Labor stops counting people who have stopped looking for work. The “labor force,” as defined by the department, fell from 155.3 million in November to 154.9. This decrease of 400,000 accounts for nearly the entire drop in unemployment — from 7 percent in November to 6.7 in December.

How the department calculates unemployment is rather simple: It takes the number of unemployed and divides it by the number of people it considers in the labor force. But does this provide an accurate account of how many people are really unemployed? Not really.

According to department statistics, nearly 11 million out-of-work Americans were not counted as unemployed in December. How is it determined who is and isn’t considered unemployed? Here are the department parameters for those who aren’t counted as part of the labor force:

Persons marginally attached to the labor force are those who currently are neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime in the past 12 months. Discouraged workers, a subset of the marginally attached, have given a job-market related reason for not currently looking for work. Persons employed part time for economic reasons are those who want and are available for full-time work but have had to settle for a part-time schedule.

The department classifies those who fall in the “marginal” category as U-6. The chart below shows actual unemployment (as defined by the department) versus the U-6 number:

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As you can see, when including those who fall in the U-6 category, unemployment remains above 13 percent.

Another troubling number is the labor force participation rate, which dropped to 62.8 percent in December — the lowest since December 1977, according to the Bureau of Labor Statistics. That translates to 91.8 million people not in the workforce.

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Jason Furman, the White House chairman of the Council of Economic Advisers, said the latest jobs report shows that “as our economy continues to make progress, there’s a lot more work to do.”

House Speaker John Boehner wasn’t as impressed.

“There are more families living in poverty today than there were before the president took office, and instead of making it easier to find a good-paying job, Washington has been more focused on making it less difficult to live without one,” he said.


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