By the Numbers: Is the unemployment rate a “big lie”?

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Jim Clifton, chairman and CEO of the polling company Gallup, published an opinion piece this week denouncing the official unemployment rate of 5.6% as a “big lie.” It’s a lie, he says, repeated to make the Obama administration look good and deceive Americans about the economy.

“The media loves a comeback story,” he writes, “the White House wants to score political points and Wall Street would like you to stay in the market.”

You see these kinds of stories every few months when there’s a drop in unemployment (last November, it was Sean Hannity making a stink, in past years it’s been GE’s former CEO Jack Welch), and you’ll probably continue see them for the rest of your life.

The reason is that one side is always trying to make the economy look worse than it is commonly supposed to be, and journalists and pundits are always looking for sensational stories. What happens is this: someone will breathlessly “discover” basic facts about what “unemployment” means from a school textbook or the BLS.gov website, where the numbers are reported each month, and they will indignantly report that what they vaguely guessed “unemployment” should mean is not what it actually means.

Anyone who has ever taken an Econ 101 class (or has bothered to Google it once) knows that “unemployment” means civilians who are not employed but are actively seeking work. This does not include, for instance, people in prison, active-duty military, stay-at-home parents, teenagers who don’t work but aren’t looking to, retirees, and anyone else who for any reason has not tried to find a job in the last month.

This number is added to the number of people who are employed, meaning that they did some kind of work for pay in the last week, and these two numbers taken together compose the civilian labor force. The basic or “official” unemployment rate is the number of unemployed divided by the total labor force.

So what’s the problem? Basically, the complaint is that this one number doesn’t tell you the whole story about the labor market. For instance, it doesn’t include people who used to be looking for work, but who have given up and dropped out of the labor force entirely (“discouraged workers”). It also doesn’t tell you about part-time workers who are employed but want more hours than they can get (“underemployment”).

So, for instance, it could be true at any given time that the unemployment rate is falling because the unemployed are leaving the workforce, because they’ve stopped looking for work, or they are finding work just by settling for part-time jobs.

But of course one number can’t tell you everything that’s relevant to the economy or the labor market. Not giving you the answer to life, the universe, and everything doesn’t make the number a “lie”. If you tried to capture all those different kinds of workers in the same number, you would necessarily change the meaning of what was being reported.

If people don’t understand what the unemployment rate means, that’s the fault of shoddy journalism, not the figure itself. But it’s also not true that nobody is reporting on these other factors, like the shrinking labor force or underemployment. Just Google it.

The good news is that we have additional figures, like the employment-to-population ratio and other measures, to help capture different aspects of the labor market. Below, for instance, you can see that the percent of people employed, as a share of the total US population, has fallen to its lowest level in 30 years, tanking in ’08-’09 and not recovering since. Unemployment went up during this time, but the labor force also shrank substantially, in part because many members of the aging American population simply retired after losing their jobs instead of looking for new ones.

BLS employment to population 1980 - 2014

And the claim that official statistics ignore the discouraged and underemployed is simply not true. Yes, one measure of unemployment doesn’t capture it, but the Bureau of Labor Statistics also collects data on discouraged, marginal, and underemployed workers, and it’s reported every month, right next the basic unemployment rate.

Below you can see that this issue of discouraged workers is not new, nor unique to our present situation or even to weak economies generally. There are always discouraged and underemployed people, in good times and in bad.

BLS unemployments 2000 2014

You can see that discouraged and underemployed workers have always been with us — was the unemployment rate still a “big lie” for reporting these groups separately when times were better? Nonsense.

Moreover, it’s also not true, as Clifton implies, that the unemployment rate is going down only because workers are falling into the discouraged or underemployed camps.

While the official unemployment rate slowly fell from a peak of nearly 10% in 2009 to 5.6% as of December 2014, the percentage of discouraged and marginal workers has stayed pretty constant, and the rate of underemployment also fell, from almost 6% at its peak down to 4.3% last month.

It’s true that underemployment hasn’t gone down as fast as unemployment (they’ve fallen 37% and 43%, respectively, from their peaks), which is a sign that the labor market is still quite sluggish — and after all, 5.6% unemployment isn’t nearly full employment. (Or is it?) I’m not trying to suggest that everything’s great or that there is nothing to be concerned about, but things are quite a bit better than they used to be, and the official unemployment rate reflects (more or less accurately) much of that improvement.

Bottom line: it’s not (or shouldn’t be) news that one statistic doesn’t tell you everything, and it’s not deceptive to use it as one metric to compare how the labor market is doing today relative to years past. What is deceptive is to shout about the number of underemployed or discouraged workers today, without putting it into the context of what it is under “normal” circumstances and what the trend is.

The unemployment rate isn’t a lie, it’s just not perfect, and nobody should think they can be well-informed about the economy as a whole just by reading one number.

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Daniel Bier

Daniel Bier

Daniel Bier is the executive editor of The Skeptical Libertarian.

View all posts by Daniel Bier

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