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Real Unemployment Rate Explained

by Darwin on July 11, 2012

You’ll often hear about a horrible jobs number and then get an update that the jobless rate hasn’t budged, or in some cases, actually improved.  How can this be?  Well, because the “official” government reported figure grossly underestimates those out of the workforce because it simply stops counting people in the denominator who have given up and stopped looking.  So, the 23 year old who threw in the towel and resigned himself to living in the basement at mom and dad’s?  He doesn’t count as unemployed.  The 61 year old who was nowhere near retirement capability after losing half his money in his 401(k) and half his home equity?  He’s not counted either, even though he can’t get a job.  With this in mind, the mainstream media reports an 8.2% unemployment rate, but the real rate is actually 14.9%.

 

U-3 vs. U-6 Government Data

 

The government reports the U-3 number which is defined as the following: U-3 Total unemployed, as a percent of the civilian labor force (official unemployment rate)

While the real unemployment rate is also reported by the Bureau of Labor and Statistics as the U-6, only a select few media outlets and financial analysts reference it.  But here’s that definition: Total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force - NOTE: 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. 

 

Here’s a screenshot of the country’s horrible jobs picture or you can click here to visit the BLS website and see for yourself.

Why would the government insist on reporting U-3 rather than U-6 even though U-6 is clearly more relevant?  Think about that for a moment.

Now, here’s the chart that will really blow your mind.  You figure with all these hope and change youngsters entering the workforce over the past few years and the “recovery” we’re in right now, that with a declining reported unemployment rate, we’d have an increasing percentage of Americans getting back to work, right?  Check this out.  We have the same % employment as we had DECADES AGO.

total-employment-chart

 

Let me say that again.  On a percentage basis, we are worse off from a proportion of working population standpoint than we were in the early 80s.  Now that is something to think about.

 

{ 13 comments… read them below or add one }

krantcents July 11, 2012 at 11:02 pm

Unemployment like some other statistics are very political. They are used to make whatever point(s) necessary. I have always had a problem about the people who drop off just because they are no longer collecting unemployment. They are not employed so they just fall into a black hole.

Reply

Darwin July 11, 2012 at 11:19 pm

Yeah, in this case (all administrations have done it), appears to be a blatant effort to mask the truth.

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Financial Samurai July 12, 2012 at 1:38 am

I think a lot of us DON’T have to work, and we are blowing unemployment out the window. Our safety net is pretty generous and there is a lot of under the table income.

On my sabbatical, I met loads of people not working and playing tennis everyday as they don’t need the money.

Sam

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Investor Junkie July 12, 2012 at 7:14 am

Sam always living in the wacky world known as California.

I think it’s pretty safe to say MOST people have to work or are in serious financial do-do.

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Financial Samurai July 12, 2012 at 10:17 am

You say that to feel better about yourself. Media loves schadenfreude.

Just like in 2000. So many of us made a KILLING in the internet bubble, but all everybody did was talk about how folks lost money.

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Investor Junkie July 12, 2012 at 10:26 am

Sam,

You can’t have it both ways. You write a post on your blog how people are hurting and you feel sorry for them being unemployed. Now you state most don’t have to work…

Which is it?? Are people hurting or are people wealthy? Yes I realize you can have both in society.

The question is what is your narrative? All I see are comments made by you to go against the grain of the post. Primarily to stir up controversy.

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Financial Samurai July 12, 2012 at 4:47 pm

Bingo! “Yes I realize you can have both in society”

You can always argue one way or another. Best to see BOTH sides of every story.

Hey, Digg got sold for less than what one of my clients got in severance today. Now THAT is bullish!

Darwin July 13, 2012 at 5:20 pm

Sam, gotta hand it to you, I always cherish your comments. This one had me howling “On my sabbatical, I met loads of people not working and playing tennis everyday as they don’t need the money.”

…On so many levels.

We’re going third world by the minute and you think people playing tennis who don’t need money are in any way representative of the US at large?

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Financial Samurai July 13, 2012 at 5:37 pm

If you’re playing tennis on free public courts in the park in the middle of the weekday, it means you do not need to work or look for work, does it not? Watch people’s feet, not their lips.

I’ve offered folks a new way to make a lot of money by engineering their own layoffs. Is six years worth of living expenses not a bullish sign? If one saves 50% of their after tax income, that severance package saves that person 6 years of work and savings!

Bullish!

Sam

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Investor Junkie July 13, 2012 at 6:55 pm

Hmm I must be able to engineer my own layoff from my own company right?! As if everyone works for a Fortune 500 company.. Unemployment insurance yes, severance pay ah no.

Majority of employees get bupkis when laid off.

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Investor Junkie July 13, 2012 at 7:03 pm

It means they are able to play tennis.

A + B not always equals C

No one takes vacations, or days off? No one works nights and has time during the day. No one has flex hours, no one works from home, or own their own business?

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Whit-ish collar worker August 3, 2012 at 7:10 am

I found this discussion while searching for another answer. I recall during the Clinton Administration when they announced a change in how unemployment was to be reported (of course, to make them look good). This now-distant memory of mine, is it the actual moment when the widely reported unemployment numbers went from using U-6 to U-3? Or has U-3 almost always been the number used by gov’t and media?

Interesting notes here…

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funancials December 30, 2012 at 1:31 pm

I’m upset that I’m just now finding this article. Hilarious. I think the comments are better than the article, and the article is amazing.

Reply

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