US Unemployment Rate Systematically Understated

RECENT falls in the officially reported US unemployment rate are an optimistic sign. 

That said, it is worth remembering that the official US unemployment rate (currently around 9.1%) systematically understates the “real” unemployment rate. This is not a new phenomenon, and occurs because of the particular way in which the US Bureau of Labor Statistics chooses to define a person as either “employed” or “unemployed”.

1. Understating the number of unemployed people

The US Bureau of Labor Statistics defines a person as unemployed if they fit three criteria:

  1. they do not have a job;
  2. they have actively looked for work in the last 4 weeks; and
  3. they are currently available for work.

The second criteria potentially excludes a large number of people from the definition of “unemployed person” because, in order to be considered unemployed, a person needs to have actively looked for work in the 4 weeks prior to the survey date.

It seems reasonable that an unemployed person would actively look for a job in any given month, but there are two reasons why they may not do so:

  1. Discouraged workers: An unemployed person might become discouraged. As difficult economic times persist, more and more people stop looking for work. This may happen because an unemployed person:
    • becomes discouraged due to previous unsuccessful attempts to obtain work;
    • believes (reasonably or not) that there are no jobs available in their industry or location;
    • lacks the skills needed for the jobs which are available, either because they never had the required skills or because their skills have eroded due to a long period of unemployment;
    • is discriminated against by prospective employers for some reason beyond their control (e.g. age, race, gender); or
    • becomes addicted to Twinkies and day time television. This one sounds like a joke, but it is conceivable that after a prolonged period of unemployment a person who previously had an aversion to receiving welfare payments could become welfare dependent.
  2. Passive job search: Anyone who has not made active efforts to look for work in the last 4 weeks is excluded from the definition of “unemployed” person. The US Bureau of Labor Statistics considers passive job search methods to be any form of job search that does not have the potential to result in a job offer.  So, this would mean that a person who has attended a job training program, searched through online job boards, and read through job classifieds for the last four weeks would not be considered unemployed. It is more likely that they are unemployed, but that they have become discouraged workers (see point 1).

2. Overstating the number of employed people

The US Bureau of Labor Statistics considers a person to be employed if they did any work at all for pay or profit during the week in which they are surveyed.  

There are two reasons why the official estimate of the number of “employed” people will overstate the real number of employed people:

  1. Underemployment: Some people are underemployed. For example, a PhD graduate who works at McDonalds would be considered underemployed because the person is highly skilled yet works in a low paid/low skill job. Any part-time or casual workers who would prefer to work full-time are also considered underemployed. For the purposes of calculating the unemployment rate, underemployed people are considered to be “employed” which means that the unemployment rate overstates the percentage of population that is fully-employed.
  2. Unpaid family workers: Under the US government’s definition of employment, a person is considered employed if they have worked without pay for 15 hours or more per week in a business operated by someone in their family. While working for free for your family may be dutiful and supportive, to consider a person who works for free to be “employed” would seem to overstate their employment status. Unless slavery within the family is permissible (I’m not a US lawyer, so I stand to be corrected), it would seem more logical to categorise unpaid family workers as neither employed nor unemployed. The problem with doing that of course is that it would increase the officially reported unemployment rate.