One of the major indicators that people look to when evaluate an economies overall health is the unemployment rate. And common sense would tell us that those people have the right idea. After all whether or not people are working seems like a pretty good gauge of whether or not people have money. Unfortunately this is not always the case and Unemployment as an economic indicator has several flaws that need to be acknowledged in order for it to have any real usefulness as a tool in discussing the impact of economic policies. In this month’s It’s the Economy Stupid I’ll break down for you just what exactly politicians and pundits mean when they talk about unemployment.
The unemployment rate in the traditional sense is determined by dividing the number of unemployed workers by the total labor force and turning that number into a percent. Nothing at all complicated about that. But like any good political or academic discussion the devil lies in the definitions. Specifically who constitutes an unemployed worker and how do you define the total labor force.
In most governmental data an unemployed worker is defined as someone without work who is willing to work, is available to work, and has actively sought work in the previous four weeks. This is a rather limited definition as it excludes discouraged workers, those who have been out of work so long they have given up actively looking for work, and young workers who may be enrolled in school but are still in need of work to pay their bills. In a robust economy this is less of a problem but in a prolonged recession such as the one the US is just now beginning to come out of it can seriously affect the way policy makers and voters judge economic health.
How so? Well let’s take the concept of the discouraged worker. Perhaps you have two parents with a young child at home. Both parents work until Dad is laid off. Mom (or other Dad whatever) keeps working and Dad takes care of kiddo while looking for work. But Dad can’t find work or can’t find work that pays enough to offset child care costs so Dad gives up looking and becomes Stay-at-Home Dad. At this point most labor statistics will have considered him to have left the work force. The thing is Dad would go back into the workforce in a heartbeat if he found a job that paid enough to cover child care so is it really accurate to exclude him from what we consider “the work force”? Discouraged workers leaving the labor force like this reduces the unemployment rate sure but that doesn’t mean the economy got any healthier.
Moving on from there, examine the case of the millennial during this last recession. College has gotten rather expensive in the last thirty years and that’s not just from inflation. The majority of college students need to take out loans in order to attend (at interest rates higher than the banks but you know whatever congress). As “helpful” as those loans are many students need to find part time work in order to make ends meet. If they can’t find that work they have trouble making ends meet and need to borrow money from family (cutting down on the savings of their parents) or from the government (increasing their own debt burden at the ripe old age of 18). These young job seekers are not considered to be unemployed however because they are in school. So they do not count towards the unemployment rate.
This works on another level as well. Many millennials exited college in the middle of one of the worst recessions in America’s history. Unable to find work they went back to school to earn graduate degrees (increasing their debt burden in the process, again). And again because they are in school they are not considered in the unemployment rate but really they should be since an inability to find work is the driving force behind their life choices.
In addition to discouraged workers and young workers the unemployment rate fails to account for those workers who are underemployed. Those seeking full-time employment but are only able to find part time employment. A person may be making ten dollars and hour and employed but if they’re only working ten hours a week they are going to end up on welfare and food stamps. So here we have a person with a job needing to take money from the government in order to feed themselves but they have a job so they do not count in the unemployment rate. That may make technical sense put it doesn’t exactly pass the scoff test.
Obviously unemployment is a larger issue than what I can get into here in a small blog post but I hope this information concerning the flaws with the unemployment rate as an economic indicator encourages you to take a closer look and ask pertinent questions the next time a politician or and economist quotes this figure to you in an effort to prove a point.