How the Government Distorts the Unemployment Rate

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Like most things in government, there is always more than meets the eye when it comes to government statistics. When we hear people talk about how great Obama has been for the economy, it is usually because of the following but not limited reasons:

  1. He helped avert the Great Depression

 

  1. He brought the unemployment rate down.

 

  1. He cut the deficit in half

 

  1. Inflation is low

 

  1. The GDP (Gross Domestic Product) is the highest in the history of the world, and he saved the auto industry, banking industry, etc.

 

  1. He reigned in Wall St

 

 

 

I’m not going to tackle all of those issues today but part 1 of my Government Lies series will begin with debunking the unemployment rate.

 

The first issue I want to tackle is the unemployment rate.  When Obama took office, the unemployment was double digits, and now eight years later we find ourselves sitting at 4.9%.  Pretty hard to argue with those numbers… or is it?

Like most things in politics there is usually more behind the numbers than what meets the eye.

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When looking at a chart of the unemployment rate for the past 10 years, it looks like we’re in a pretty good spot economically.   However, this rate known by economist as the U3 rate, gives a very narrow definition of unemployment and its calculation methodologies have been changed throughout the years.

U3 is also referred to as headline unemployment aka the number you see in the newspapers.

Did you know that once you’ve been unemployed for more than 1 year, you actually don’t count as being unemployed anymore?  

That’s right, you can be unemployed and not be counted as unemployed.   Actually, to not be counted as part of headline, you simply have to have not looked for work the previous 4 weeks.

So if you’ve been looking for months and can’t find anything meaningful and you become discouraged you can now find yourself counted in the U6 rate.    If this persists for more than 1 year, then you fall off u6 as well.

But what I think is the most egregious examples of how the unemployment rate is skewed is the following scenario:

Let’s say George used to be an engineer making $125,000 and George was laid off.  After not being able to find work George is now forced to take a job as a waiter and another as a bar tender.   Even if George is now making a fraction of what he used to make he actually now counts as two jobs to the economy vs the 1.  So in essence even though George is at a major net worse position the unemployment rate would benefit from his position.

Time after time you see the hospitality sector as the one sector gaining the most amount of jobs and sometimes government.  We can only have so many college educated waiters and waitresses. This is not a knock on anyone’s profession but rather an illustrative result.

 

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My favorite source for reliable economic information is www.shadowstats.com .  They publish information on unemployment, inflation, money supply, etc.  What makes their site unique is that they not only include the headline numbers but also include prior methodologies for how the government used to collect statistics.

For example for inflation they will not only give you the inflation rate for today but what it would be today if it were calculated in the 90’s and 80’s.

When we look at Graph 1 we can see that once you count the long term discouraged and those who are working way below their skill level you get an unemployment rate that is hovering around 23%.   On an absolute basis this would imply the average worker is worst off today than they were before the recession occurred.  I’ve always contended that if things were as great as we’ve been told then how come they can’t raise interest rates?

 

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Graph 2 just inverts the scale whereby the unemployment rate (as calculated by shadowstats) increases as you go further down the axis.

 

The opinions expressed in this material do not necessarily reflect the views of LPL Financial.

 

The last measure of unemployment I would like to discuss is the labor force participation rate.   When those workers who become long term unemployed fall off the voter rolls unfortunately for the government they don’t just disappear.  They show up in something known as the labor force participation rate.  This shows the percentage of able bodied Americans who aren’t in jail who have jobs.

If we take a look at the graph below we can see that this rate has been falling the past two decades and is nothing to take a victory lap on.

 

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I hope you now have a better understanding of how the unemployment rate is manipulated and another reason why the FED has been dragging their feet with rate hikes the past few years.

 

Sincerely,

Tim Picciott

 

 

Remember to please like my facebook page, linkedin page and for more information you can check us out at www.FocalPointWealth.com and for more information about shadowstats methodology you can read more here  http://www.shadowstats.com/article/c810x.pdf