Today, the Bureau of Labor Statistics announced that the unemployment rate for December 2014 was 5.6%. This was down from 5.8% in November 2014.
It will be helpful to explain how the BLS comes up with their unemployment numbers. First, they divide the population into three groups:
1. Under 16 or Institutionalized. This category includes teens who have part-time jobs, members of the military, and people in prison. People in this category are not included in the calculation of the unemployment rate.
2. Not in the Labor Force. This category includes all adults who are potential workers but are not employed and are not seeking work. People in this category are called discouraged workers, and they are not included in the calculation of the unemployment rate.
3. The Labor Force. This category includes all adults who are willing and able to work. The labor force includes those who are employed and those who are unemployed and actively seeking work.
In order to calculate the unemployment rate, the BLS uses the following formula:
Unemployment rate = [# of unemployed/Labor Force] X 100
There are two problems with the way the BLS calculates the unemployment rate:
- The BLS counts part-time workers as if they were working full-time. The BLS makes the assumption that part-time workers have more than one job. And since 20 + 20 = 40, they count them as employed. So it is possible for someone to take a job for 20 hours a week and go from being considered unemployed to employed. This would cause the unemployment rate to fall, even though that worker is barely working.
- Discouraged workers are not counted as unemployed. The way someone goes from being counted as unemployed to not being counted as a discouraged worker is this: they quit looking for work. The BLS stops counting them as unemployed and the unemployment rate goes down even though the worker didn’t find a job and is still unemployed.
Here are the pertinent excerpts from the BLS report:
- In December, the number of long-term unemployed (those jobless for 27 weeks or longer) was essentially unchanged at 2.8 million and accounted for 31.9 percent of the unemployed. So, the number of unemployed didn’t change, but the unemployment rate fell. Hmm…
- The civilian labor force participation rate edged down by 0.2 percentage point to 62.7 percent in December. Fewer people in the labor force will result in the unemployment rate falling.
- The number of persons employed part time for economic reasons (sometimes referred to as involuntary part-time workers) was little changed in December at 6.8 million. These individuals, who would have preferred full-time employment, were working part time because their hours had been cut back or because they were unable to find a full-time job. These people are considered to be full-time workers when the unemployment rate is calculated.
- In December, 2.3 million persons were marginally attached to the labor force, little changed from a year earlier. These individuals were not in the labor force, wanted and were available for work, and had looked for a job sometime in the prior 12 months. They were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey. So, last month they were counted as unemployed. But since they looked for a job in December (probably by applying for temporary work during the holiday season) they are no longer counted as unemployed. This would cause the unemployment rate to fall.
When all of these factors are taken into consideration, the true unemployment rate is not 5.6%. It’s double that: