A Closer Look at Unemployment

All eyes are on Friday’s NFP Report. With the markets desperately rooting for a Fed cut, especially after yesterday’s rather punk ADP Employment Report, tomorrow’s BLS release is eagerly awaited.

In the past, I have frequently mentioned that I was not a big believer in the headline Unemployment number. Its methodology — the Household self-reported survey — is suspect, and it simply ignores too many people who are unemployed.

It is not that the unemployment rate is so very bad — its just not nearly as good as the 4.6% we have heard the BLS report. If there were that much of a labor shortage, than real wages have likely risen much more than they did over the past few years.

This line of argument is often greeted by skepticism (what are you, a conspiracy theorist?).

However, what many people seem not to realize is that the source for alternative measures of unemployment comes from none other than the Bureau of Labor Statistics themselves. They actually have quite a few official measures of Unemployment — not that you ever hear about the others.

There are actually six BLS reported measures of Unemployment. (They can be found here: Table A-12: Alternative measures of labor underutilization)

The headline number that you will hear tomorrow — what BLS calls "the official unemployment rate" — is called U3. It is defined as the "Total unemployed, as a percent of the civilian labor force."

For the mathematically inclined, that looks something like this:

Unemployment rate = (unemployed) / (employed + unemployed)

Take those termed unemployed, divide that into the civilian labor force, and you get a percentage.>

Let’s look at the other measures of Unemployment BLS reports that are more inclusive than U3.

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Alternative Measures of
Labor Underutilization
Measure: Definition:
U1 Persons unemployed 15 weeks or longer, as a
percent of the civilian labor force
U2 Job losers and persons who completed
temporary jobs, as a percent of the civilian labor force
U3 Total unemployed, as a percent of the
civilian labor force (the official unemployment rate)
U4 Total unemployed plus discouraged workers,
as a percent of the civilian labor force plus discouraged workers
U5 Total unemployed, plus discouraged workers,
plus all other marginally attached workers as a percent of the civilian labor force plus
all marginally attached workers
U6 Total unemployed, plus all marginally
attached workers, plus total employed part time for economic reasons, as a percent of
the civilian labor force plus all marginally attached workers (the "real world" unemployment rate)
Note: Marginally attached workers
are those who 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 recent past.
Discouraged workers, a subset of marginally
attached workers, have given a job-market-related reason for not currently looking for a
job.
Persons employed part time for economic
reasons
are those who want and are available for full-time work but have had to settle for
a part-time schedule.

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How do these various unemployment measures shake out?

U4 = 4.9%

U5 = 5.5%

U6 = 8.3%

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Here’s a graphic comparison:

Alt_measures

(thanks, Oregon!)

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Now you know . . .

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Sources:

Table A-12: Alternative measures of labor underutilization
BLS
http://www.bls.gov/news.release/empsit.t12.htm

Measuring Available and Underutilized Labor Resources
Federal Reserve Bank San Francisco
Economic Letter, 2000-06; March 3, 2000
http://www.frbsf.org/econrsrch/wklyltr/2000/el2000-06.html

How the Government Measures Unemployment
U.S. Department of Labor, Bureau of Labor Statistics. 1994.
Report 864 (February)
http://www.bls.gov/cps/cps_add.htm

Alternative Measures of the Unemployment Rate
Eric Moore
Oregon Employment Department, Mar-29-2006   
http://www.qualityinfo.org/olmisj/ArticleReader?itemid=00000486&print=1

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Over at Slate, Tim Harford has an interesting discussion on a rather intriguing economic question: Why Are Poor Countries Poor? The answer is less obvious than you might imagine. The usual explanation goes something like this:  "One very plausible account of why at least some poor countries are poor is that there is no smooth…Read More

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This month is a milestone of sorts: Its the first time we have passed a million page views in a given month:

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A Demon of Our Own Design

I previously mentioned A Demon of Our Own Design in a linkfest a few weeks ago. I enjoyed the book a great deal, and just about finished it over the long weekend.

The opening paragraph just reached out and grabbed me: 

Bookstaberdemon_jacket"While it is not strictly true that I caused the two great financial
crises of the late twentieth century—the 1987 stock market crash and
the Long-Term Capital Management (LTCM) hedge fund debacle 11 years
later—let’s just say I was in the vicinity. If Wall Street is the
economy’s powerhouse, I was definitely one of the guys fiddling with
the controls. My actions seemed insignificant at the time, and
certainly the consequences were unintended. You don’t deliberately
obliterate hundreds of billions of dollars of investor money. And that
is at the heart of this book—it is going to happen again. The financial
markets that we have constructed are now so complex, and the speed of
transactions so fast, that apparently isolated actions and even minor
events can have catastrophic consequences."

Terrific stuff.

Indeed, I enjoyed the rest of the book. Bookstaber was on the scene in the early days of many of derivatives now contributing to market turmoil. He rather deftly makes complex issues readily understandable, regardless of how much advanced mathematics you may have under your belt.

And, he names names. LOTS of names. All the usual suspects come under scrutiny, as well as a lot of folks who probably assumed they were not int he public eye. There will be a lot of people not very happy with his blunt, insider descriptions of the analytical errors made by major players — many of whom are still around today and in positions of authority and power. 

He also accepts a lot of responsibility for many costly errors he himself made.   

Overall, a fun, very informative read.

I was intrigued enough by the book that I contacted Bookstaber (the author) and Wiley (the publisher), and asked for their permission to reproduce the first chapter. They graciously sent me a pdf and text version, which you will find after the jump: All of chapter one, in both text form and PDF. I also included some mainstream media reviews after the chapter. 

I have pretty good relationships with many of the publishing houses — they all want to get a book or two out of me. Anyway, if it turns out you guys like this idea, perhaps we can offer up a book or two that I am reading every month in this same format. Maybe we can have an online reading group club — it could be a good place to have a full discussion. Share your thoughts.

Enjoy chapter one.

~~~
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Disclosure:  No, I don’t accept money for this — it was my idea, and I approached the publisher and author about this — not vice versa. Please don’t start bombarding me with offers to promote books I am not already reading. They will be unceremoniously deleted without response.

As noted in our disclosure section, we don’t do payola here (if you click thru and buy it on Amazon, I do see some scratch).

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