The Real Unemployment Rate

Recently the U.S. Labor Department Bureau of Labor Statistics (BLS – bls.gov) published the ‘official’ unemployment rate at 7.8%. This is the first time since Obama was inaugurated that the unemployment rate was below 8%. It’s also very misleading.

The ‘official’ unemployment rate is referred to as the ‘U3’ rate. It is misleading because it does not count as unemployed those people who are working part time jobs because they cannot find full time employment. It also does not count those people who have simply given up looking for work because they can’t find a job.

The Bureau of Labor Statistics (BLS) calculates this number as well, it’s referred to as the ‘U6’ unemployment rate. The BLS describes it as the “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.” They state that: “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.”

I maintain that the official unemployment rate should be the U6 unemployment rate rather than the U3 rate because as soon as the economy starts improving, both groups not included in U3 will start or continue to look for full time work. This will have the effect of raising, or keeping high, the U3 rate longer than the broader U6 rate. In other words, the U6 unemployment rate will start to come down before the U3 unemployment rate.

It has been claimed that unemployment is a lagging indicator, that is, it rises or falls later than other economic indicators. That may be true. If so, does it make sense to use an unemployment definition that lags other definitions? Perhaps so, if the interest is political rather than accuracy, to report unemployment as lower than it actually is for the benefit of politicians.

This is a graph of the U6 Unemployment rate.

U6 Unemployment 1994-2012

U6 Unemployment 1994-2012

I have indicated significant changes in the political control of Federal government and also the location of the 9/11 terrorist attacks on NYC and Washington, D.C.

For 50 years, up until 1995, the U.S. House of Representatives was controlled by the Democrats. The U.S. Senate had flipped back and forth over the years.

After the 2000 election, George W. Bush took office on January 20, 2001. There was a recession in 2001 as well as the terrorist attacks in New York & Washington, D.C. on September 11, 2001.

The U6 unemployment rate had topped out about 10% and gotten back down to about 8% when the Democrats took over both branches of the Congress in 2007 (after the 2006 election). They almost immediately set about bullying the banks to make home loans to marginal borrowers, using the Community Reinvestment Act (CRA, signed by President Jimmy Carter in 1977) to threaten them.

The banks sold their questionable loans to Fannie Mae and Freddy Mac, government-sponsored enterprises, who repackaged the substandard loans as “mortgage backed securities” and sold them to investors.

By the end of summer 2007 the housing market began to decline starting the foreclosures of houses owned by subprime borrowers.

President Bush tried to get the Democrats in Congress to regulate Fannie Mae and Freddy Mac 17 times in 2008, but they refused.

In September 2008 Lehman Brothers went bankrupt and the global credit markets seized up.

In November 2008 the country elected Mr. HopeNChange, Barack Obama, to the presidency as well as a Democrat supermajority in Congress. He took office on January 20, 2009. As he likes to remind us, the economy was losing 700,000 jobs per month and Republicans were powerless to stop the Democrats’ agenda.

As you can see from the graph, the U6 unemployment rate was about 14% and headed higher when Obama was inaugurated.

You can also see that it hasn’t been lower than 14% since.

It’s interesting to note that the crash that happened at the end of the Bush presidency was precipitated by the Democrats in Congress using legislation (CRA) passed by Democrats in Congress and signed by a Democrat President (Jimmy Carter).

It’s very dishonest for Democrats to blame the crash on the Bush Administration and Republicans without acknowledging their own culpability.

We need to remember this when we go to the polls in November and every other November in the future.

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