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Misunderstanding Unemployment Data

Posted By Barry Ritholtz On February 6, 2005 @ 6:02 pm In Economy | Comments Disabled

A friend quite sarcastically writes:  

“its a disaster that only 94.8% of all people looking for a job in this country can find one”   

Um, no.

The number referenced is the percentage of people working, relative to the total labor pool. The 5.2% unemployment rate does not represent, as suggested below, a percentage of unsuccessful job hunters.

Here’s how to track this: Go to The Street.com’s free Economic Calendar [1].  Most people get the Unemployment Rate [2], and stop there. But as I mentioned previously, the headline number can be misleading. There are severalother measures you can review. If you look at the Augmented unemployment rate [3] — created by Greenspan to give a fuller read on the Economy — its over 8%. And, if you use BLS’s U-6 — the broadest measure of Unemployment, which adds back in discouraged workers — we’re closer to 9.3%.

Here’s another interesting data point: Look at the Pool of available workers [4] — its been going down since mid-2002, despite the continually rising total U.S. population. Curious, huh?

This helps explain why the Unemployment rate has been going down — its not because more people are getting jobs; Rather, its because the labor pool keeps shrinking.

Remember, a percentage is a fraction with 100 understood as the denominator. Unemployment Rate is 100 minus the Employment Rate % (workers/labor pool).

There are only two ways to make the unemployment percentage smaller: Make the numerator bigger (more people getting jobs) or make the denominator smaller (less people in the labor force). The unemployment rate has been going down due to the NILFs [5]: People NOT IN the LABOR FORCE.

This has very significant ramifications for the broader economy, as well as the market. Investors are advised that they ignore the fine print at their own financial peril . . . 

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URL to article: http://www.ritholtz.com/blog/2005/02/misunderstanding-unemployment-data/

URLs in this post:

[1] The Street.com’s free Economic Calendar: http://www.thestreet.com/markets/databank/10205735.html

[2] Unemployment Rate: http://www.thestreet.com/tsc/editorial/images/ecocharts/unemployment.html

[3] Augmented unemployment rate: http://www.thestreet.com/tsc/editorial/images/ecocharts/augmented.html

[4] Pool of available workers: http://www.thestreet.com/tsc/editorial/images/ecocharts/pool.html

[5] NILFs: http://www.thestreet.com/p/_rms/dps/cc/20050204/columnistconversation1.html#entryId10207499

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