4.6% Unemployment is actually 5.5%

Because of the office move (broadband gets hooked up today tomorrow), I have been a few days behind in tearing apart major releases. Yesterday, we gave the business to last week’s Back-to-School sales data, which was weaker than it appeared.

We previously noted the many different ways BLS measures and reports unemployment (A Closer Look at Unemployment).

Today, we are going to identify an “issue” with the Unemployment Rate and Non Farm Payrolls — specifically, a look at the “official” U3 labor utilization rate, aka the 4.6% Unemployment Rate.

This Employment rate is expressed as a percentage. Its a simple fraction, with the number of employed as the numerator (the number on the top of the fraction) and the civilian labor pool as the denominator (bottom of the fraction).

This gives you a percentage; subtract that percentage from 100 and you get the Unemployment Rate. It looks something like this:

The Civilian labor force for August 2007 = 152,891;  The Employed = 145,794. Put them in the formula above, and you get 0.95358130956 — approximately 95.4% Employment rate, and an Unemployment rate of 4.6%. The “Not Seasonally Adjusted” numbers generate approximately the same data: 0.953828513352

As we have seen in the past, there are two ways the Unemployment Rate can go lower, or stay. The “good” way is when more people get jobs. Then, the numerator goes or stays higher, and the percentage of unemployed goes lower.

The bad way is for the denominator to go lower. We have referred to this number in the past as NILF — Not-in-Labor-Force.

And that is precisely what happened to the Unemployment Rate in this month’s NFP. The BLS Household Survey (Table A-1. Employment status of the civilian population by sex and age) showed that in one month, the US labor force decline 1,379,000. (July 2007 = 154,871,000; August 2007 = 153,493,000).

That’s an awful lot of people who suddenly decided to “retire.” Similar numbers can be seen in the July 2007 “Not in labor force” — it ticked up from 77,087,000 to August 78,717,000). If it wasn’t for this sudden drop in the labor force, the Employment rate would have been = 0.945341606886.

In  other words, a sudden and unexplained disappearance of a million plus workers from the labor pool managed to keep the Unemployment Rate almost a full percentage point below where it is more likely to be in that artificial construct called reality.

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Some people will object to my not using “Seasonally Unadjusted” numbers. I have yet to figure out how these adjusting algorithms work. So let’s use the year-over-year numbers — no seasonal adjustment is necessary, as this compares an August to August. Persons “Not in labor force” declined increased from 76,702,000 in August 2006 to 78,717,000 in August 2007. That’s a drop of 2,015,000 over a year’s period. Some surely represent retirees, etc. But that’s an awful lot of people o have dropped out of the Labor Force in a single year.

The bottom line is that the seasonal adjustments and NILFs managed to artificially subtract about a percentage point off of the Unemployment Rate. Without that adjustment, the rate would be closer to 5.5%

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Disclosure: We are short Korn Ferry (KFY), the exec recruitment firm.

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