10.2 Percent? Would the Real Unemployment Rate Please Stand Up

Today, the federal government released statistics showing that the unemployment rate rose to 10.2%-- more than expected. Unfortunately for the United States, that number, while grim for many, doesn't remotely reflect the true unemployment. The jump past 10% was attributed to changes in teen unemployment and the self-employed. Although many economists were surprised by the leap, it shouldn't have come to a shock to anyone who really understands the unemployment figures. Anyone that delves into the Bureau of Labors Statistics (BLS) statistics, the organization that calculates official unemployment, would know that the true unemployment rate likely lies somewhere between 17% and 22%.

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Both families and individuals need to make smart decisions about their spending as the government and the press paints a picture of a recovering economy. The government has a vested interest in consumers opening up their pocketbooks to get the economy going again. However, if such spending is done on credit, as was the case for the first seven years of this decade, households will only find themselves further behind in the future. The recent stimulus programs including Cash for Clunkers and the recently extended Homebuyer tax credit take the two largest debt producing transactions and incentivize them with a relatively modest 3% to 18% contribution from the federal government.

It is smart for the government because the sales and income taxes generated at the state and local level make all governments as a whole even on the transaction. Since the Federal government would likely have to bail out some of the states, particularly California, such programs allow the government to make a tax transfer indirectly instead of providing additional grant funds or emergency loans. But if consumers were fully aware of the state of unemployment, would they be so eager to buy a house or an automobile?

The official unemployment statistics give a relatively rosy picture of America. Simply interpreted, one would think that 9 out of every 10 Americans are employed. That thinking is completely erroneous and fails to understand the nuances of the governments' statistics. In order to fully understand how unemployment is calculated, one needs to first know its official definition. The official BLS definition of employment is:

Persons are classified as unemployed if they do not have a job, have actively looked for work in the prior 4 weeks, and are currently available for work.

Such a definition is open to a significant amount of interpretation and most importantly excludes those who have given up all hope of getting a job. The BLS also requires specific evidence that someone has been looking actively for a job, in absence of such evidence, the individual is considered to be "Not in the Labor Force". If large numbers of unemployed persons were not being counted, one would expect to see a surge in those "Not in the Labor Force". Such a dramatic increase has been occurring since the 1990s and has only accelerated in recent years. The table below is taken from the BLS Household data annual and most recent month averages and gives a picture of the growth in NILF each decade.

BLS Not In Labor Force (Millions of Persons)

Start Year Start NLF End Year End NLF Change % Change
1980 59.9 1989 62.5 2.6 4.3%
1990 62.5 1999 68.4 5.9 9.4%
2000 68.4 2009 82.6 14.2 20.8%

While their may be demographic reasons for these increases, such as women actively exiting the workforce due to personal choice or economics, the magnitude of the surge in the last 9 years exceeds any known demographic trends. In addition, the wave of baby boomers that are likely to retire early is just getting started. The BLS did mention in their press release that the marginally attached (which are really unemployed) rose from 0.7 a year ago to 2.4 million last month, but this is just a fraction of the increase. Assuming a constant rate of growth in NILF based on the trend of the 1990s, which itself may have been elevated, unemployment would likely be nearly 5 percentage points higher. Fifteen percent unemployment would certainly raise eyebrows both here in the United States and investors overseas. Unfortunately, the real numbers are significantly worse.

Amongst the 154 million plus employed workers are 21 million government workers. The government workers mask higher unemployment rates in the private sector. On the whole, there has not been a decrease in government sector employment since the Recession started, and this has been accomplished by Federal deficit spending and unsustainable maneuvers at the state and local level. If those workers are excluded from the calculations, private sector unemployment would be at 17.4%. If there is going to be a drag on the official numbers in the future, it will come from the government sector as state and local governments finally have to come to terms with declining revenues and run out of accounting gimmicks to tie them over. Such as process has already started at the local level and will move to the states. Eventually the Federal government will need to succumb to the reality of ballooning deficits and trim some areas of their employment.

What has started to backfire on the government statistics, and was noted by many journalists, is the inclusion of self-employed workers in the employed ranks. Unlike W-2 employees who are more likely to receive a pink slip than a 50% cut in salary, self-employed workers can see their income nearly vanish while still technically being considered employed. Until September, there was virtually no reduction in the self employed figures which should have been a warning sign to anyone paying attention. Now as many self-employed are completely idled, they are showing up as officially unemployed. That trend is likely to continue driving unemployment statistics up further.

In addition to the self-employed, the BLS counts part-time workers as employed. Unlike full time employees, part-time employees have surged during the Recession and therefore have masked the extent of the problem. Part time employees have increased 50% from 6 million to 9.3 million in the last several years. Those 3 million employees represent another two percentage points that while not technically unemployed are not fully employed. As the BLS noted, they aren't choosing to be employed on a part time basis.

When taking into account all of the factors, the government could just as likely publish an unemployment figure of 17 to 22 percent. Such figures would be far more comparative to the statistics held earlier in the last Century. In many ways, such a statistic would be far more representative of the true state of affairs. Publishing the real numbers would likely set off a chilling response from foreign investors and result in far higher interest rates for the federal government. But there are serious consequences for not coming clean with these numbers. As a true recovery sets in, employment statistics may lag for years as people formerly classified as "Not in the Labor Force" are shifted to unemployed as they try to get a job. So while the government's statistics work in its favor on the front-end of a Recession, they may backfire during the Recovery.

Individuals and families who have not been directly affected by the Recession are currently sitting on their wallets and looking for the signal to start spending again. The smart ones will realize the true magnitude of the current unemployment problem and resist the temptations to incur additional debt until there is a true recovery. Given the real statistics and the coming massive retirements of Baby Boomers, prudent consumers would be better off building up their reserves, not for a rainy day, but for an extended storm the likes of which they have never seen before. It is not what the government would hope for, but it is certainly in consumers' best interest.

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