Tuesday, July 6, 2010

Why The Unemployment Rate Decline Is Misleading

Paul Jackson from HousingWire discusses the flaws in the government's unemployment reporting and argues that the recent unemployment rate decline is misleading. Part of the cause for the unemployment rate decrease is the 650,000 workers who dropped out of the labor force and are not accounted for in the government's calculation. See the following post from HousingWire.

Step right up, ladies and gentlemen! Watch, as millions of unemployed workers simply disappear — you'll be amazed as the unemployment rate drops!

Ah, the circus that is unemployment data.

Read the headlines Friday morning, and you might think that the nation's unemployment situation is improving: after all, the nation's unemployment rate fell from 9.7% in May to 9.5% in June. But the decline has nothing to do with an improvement in the nation's labor force. If anything, the improvement suggests just how inadequate our government's measures of employment really are.

Why? Because 652,000 jobless Americans simply disappeared altogether in June, dropping out of the labor force and vanishing from any and all calculations. Between May and June, nearly 1 million Americans now have fallen off the face of the Earth as far as the civilian labor force is concerned.

Many have run out of unemployment benefits, with the number of long-term unemployed at a level that remains beyond historical highs. Others are frustrated and have quit searching for jobs, while still others have gone back to school (an age-old recession management strategy).

Lest many of you think I'm simply choosing to focus on a statistic to serve some agenda I don't have, consider that the 652,000 decline in the civilian labor force during June is the single largest monthly vanishing act in a little more than 15 years, according to Commerce Department data. Which is to say that, if anything, the drop in the nation's unemployment rate is an indicator of just how bad the state of our nation's labor really is right now.

I've often referred to the U-6 measure of un- and under-employment as a more clear barometer on jobs, and by that measure, June saw a jump from 16.1% in May to 16.7% — nearly matching the 16.8% recorded one year ago. (And that's despite the amazing shrinking labor force factor, too.) This increase portends an imminent increase in residential mortgage defaults, as the U-6 is strongly correlated with default behavior.

Some analysts are already looking at more accurate ways to measure unemployment, and what they are finding is startling. Over at Fortune's Street Sweep blog, Heidi Moore discusses some of the alternative measures seeing consideration on the Street.

The Center for Economic Policy Research just yesterday released a study that adjusts the current unemployment rate to account for demographic differences, and finds that the unemployment rate has not fallen below 10.8 percent in the last 12 months. In comparison, during the worst episode of the recession of the 1980s — the second half of 1982 and the first half of 1983 — unemployment passed 10 percent for 7 months.

"An unemployment rate that has hovered above 9 percent for several months is striking, but the jobs picture is even worse than it looks," said report author and CEPR economist David Rosnick.

The CEPR study contends that, by its adjusted measure of unemployment, the U.S. is currently facing the weakest labor market since the Great Depression. And that sort of conclusion sounds much closer to reality, if you ask me.

This post by Paul Jackson has been republished from
HousingWire, a mortgage and real estate news site.
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