What The September Unemployment Rate Tells Us (Or, How I Learned To Start Worrying and Hate the BLS Data)
October 5, 2009
Latest unemployment data has come out and the people who were claiming “ah, but job losses are slowing” were smacked down and sent to the corner to think about what they’ve done.
The unemployment rate was up .1%, from 9.7% to 9.8%. That’s not so bad, right?
To speak frankly, the unemployment rate tells so little of the story at this point that it’s hardly a useful metric. If you’re looking for a useful metric, start looking at the raw unemployment numbers.
The problem with the unemployment rate is that it doesn’t compare the employed with the unemployed. Instead, it compares people who are employed with those who don’t have jobs, but have looked for a job in the last 4 weeks”. This make a certain kind of sense; we don’t want to count stay-at-home dads or retired individuals as unemployed.
However, this means that an exodus from the workforce could mask the severity of the job situation. To illustrate, I’ve created a visual:
Let’s say we have 20 people in the workforce and 2 of them fit the technical definition for unemployed, which means that they’re actively looking for work. That gives us an unemployment rate of 10%.
Now, let’s say one of the unemployed people got tired of being unemployed and decided to go back to school. She has now removed herself from the labor force, so we don’t count her when we count unemployed people. Let’s also say that one of the employed people lost his job and instead of looking for a new one, he decided to simply retire.
As you can see we haven’t added any jobs… in fact we have fewer jobs than we did before. But we took a higher percentage of people out of the “unemployed” group than we did out of the “employed” group. It’s now 1 person unemployed and 17 people employed. We’ve “slashed” the unemployment rate to 5.5%.
This current job report is actually a perfect example of this. We lost 785,000 jobs this past month. That makes it the biggest month of job losses since March. But the number of people in the unemployed group rose only 214,000. This is because we saw over twice that number simply leave the work force altogether.
If we took employment numbers for this month compared it to the labor force for last month, we would have an unemployment rate of 10.2%… almost a half a percent higher than the one we have!
I try to be an optimist, but it is hard to see this report as anything but a disaster. Furthermore, we are so far into the implementation of the stimulus, that I have a hard time seeing it as anything but a huge failure. I understand that only about 10% of the stimulus has actually been spent, but part of the point of the stimulus was to get money out into the economy in order to inject a little cash flow into the situation. That means that a huge part of the success of the stimulus relied on getting the money out in a timely manner.
I know that defenders of stimulus theory would object that it takes time to spend $800 billion and that you can’t spend that much very quickly without massive fraud. To which I reply: “Well, duh.” I think that’s a great argument against the stimulus and I wish they had brought that up back in February and March instead of bashing people like me for bringing that up back in February and March.
Back to the point, we have seen job growth in only one month out of the last 17. We need to stop focusing on the unemployment rate and start looking at raw jobs data. Only when we see the raw number of jobs start rising consistently can we be confident of economic recovery.
Note: To be fair, jobs tend to be a lagging indicator, but outside the stock market increases, I’m seeing little reason to be optimistic. And, quite honestly, the stock market seems to be very excited about absolutely nothing. It’s like they’re throwing a champagne party because the world hasn’t ended, neglecting the fact that it is still on fire.