The Economy Is Weaker Than You Think

The Economy Is Weaker Than You Think

Friday, the Bureau of Labor Statistics released its latest jobs report. The report was relatively positive; the economy added 211,000 jobs in November, and the employment rate of Americans in their prime working years increased by about 0.2 percentage points. 

But many media outlets focus on the unemployment rate when reporting on the economy. And last month, the unemployment rate was 5.05 percent — not much of a change since September and October, but half of what it was in October 2009, and about the same as it was in December 2007. That, too, initially seems like good news.

However, there's good reason to think that the unemployment rate is overstating the strength of the economy. In order to be counted as unemployed, a prospective worker must have searched for a job within the past four weeks. This means that if a large number of workers become discouraged with their job prospects and give up the search for work, the unemployment rate falls. Oddly enough, this means that the unemployment rate can decrease even if the economy isn't gaining strength.

Indeed, the unemployment rate's precipitous decline has come in the face of a low hiring rate and a high long-term unemployment rate. November's low unemployment rate may therefore be a sign not of economic strength but rather of economic weakness and discouragement amongst the unemployed over their job prospects.

One way to determine whether the official unemployment rate is overstating the strength of the economy is to compare it with alternative unemployment rates. The official unemployment rate is one of just six unemployment rates produced by the Bureau of Labor Statistics; they are referred to as the U-1, U-2, and so on, with the U-3 serving as the official rate. In a new paper, I look at the historical relationships between the alternative unemployment rates and the official rate. I also do this with six other measures identified as the U-7 through U-12 rates.

If the current U-3 rate of 5.05 percent is an accurate measure of economic strength, then the past historical relationships between the alternative rates and the official rate should hold today. For example, the U-1 unemployment rate was 2.11 percent last month; if a U-1 unemployment rate of 2.11 percent correlates historically with a U-3 rate of 5.05 percent, then the U-3 rate is likely telling an accurate story about the strength of the economy.

However, this is not the case. When we apply the historical correlations between the eleven alternative measures and the U-3 rate to today's economy, we see that the U-3 rate should by all accounts be higher. This can be seen in the table below:

Every single measure indicates that the unemployment rate is understating the weakness of today's economy. The aforementioned paper — "The Anomaly of U-3: Why the Unemployment Rate is Overstating the Strength of Today's Labor Market" — presents similar tables for the first ten months of 2015. The results hold for every month. The paper goes on to present other comparisons, for example noting that involuntary part-time employment is much higher than we'd typically assume given the current unemployment rate. The paper also presents various tables and figures showing that more expansive rates of unemployment — those that don't limit their definitions of "unemployment" to people who have searched for work in the past four weeks — are higher today than they've been in other periods with a similar U-3 rate:

This serves as solid practical evidence that the economy isn't as strong as most reporting implies. Politicians and reporters who promote the strength of the economy based on today's low unemployment rate haven't taken the time to figure out exactly what the unemployment rate measures. The unemployment rate is low not because the economy is strong and workers are moving back into jobs, but rather because the economy is weak and the unemployed have given up their hopes of finding employment.

Nicholas Buffie is a junior research associate at the Center for Economic and Policy Research.

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