The Unemployment Rate is Bullshit
And Yet the Fed and Markets Hang Everything On It!
The reported nonfarm payrolls numbers and associated unemployment rate (U3 rate) are widely recognized economic indicators that measure, respectively, the number of people added to the payrolls of companies and the percentage of the labor force that is actively seeking and available for work but cannot find employment. While these stats are used as key benchmarks for assessing the health of the economy, there are compelling arguments to suggest that the real payrolls are much lower and the real unemployment rate is significantly higher than what's reported. Here are some reasons to consider:
Revisions: The "headline" jobs numbers are an opaque, biased, politically-charged estimate by the U.S. Bureau of Labor Statistics (BLS) which are often revised several months after the originally reported headline numbers had their intended market-moving effects. In 2023, every single monthly jobs report has been revised after-the-fact to a less rosy number. For example, in July, the June nonfarm payrolls estimate was revised down from +209,000 to +185,000 (11.4% drop). Then in August, the June estimate was revised lower again by 80,000 to +105,000 (43% drop). When initially reported, the June nonfarm payrolls figure of +209,000 was a disappointment compared to the +240,000 expected, but it was played off as a mild cooling, with many sectors of the economy still adding jobs. But if it was reported accurately at the time as +105,000 (or fewer), then it would have been clear that most sectors of the economy (except government spending which accounted for +60,000 jobs) were actually contracting, i.e. in recession.
Underemployment: The U3 unemployment rate does not capture the full extent of labor market underutilization. Many individuals who are technically employed may still be significantly underemployed, working part-time when they desire full-time employment or holding jobs well below their skill and education levels. These individuals are not counted in the U3 rate but are certainly experiencing economic hardship and may even be forced to work 2 or 3 part-time or gig jobs to make ends meet, and this artificially boosts the nonfarm payroll numbers as well.
Discouraged Workers: The U3 rate does not account for discouraged workers who have given up looking for employment due to repeated rejections or a lack of available job opportunities. These individuals are effectively unemployed -- because they're not working but want to be -- but are not included in the official statistics.
Marginally Attached Workers: Some potential workers are classified as "marginally attached" to the labor force. These individuals want to work but have not actively searched for a job in the past four weeks. They are not counted in the U3 rate but should be considered when evaluating the true employment situation.
Involuntary Part-Time Workers: The U3 rate does not distinguish between those who work part-time because they choose to and those who work part-time because they cannot find full-time work. The latter group is often struggling financially and should be factored into a more comprehensive unemployment rate.
Hidden Unemployment: Structural issues in the labor market, such as job polarization or the decline of certain industries, can lead to long-term unemployment that goes unaccounted for in the U3 rate. These individuals may not actively search for work, but they would take jobs if they were available in their field. These are the people that Joe Biden notoriously admonished in 2019 to "learn to code". They are unemployed but not considered unemployed by the U3 rate.
Cyclical and Seasonal Factors: The official unemployment rate can fluctuate due to cyclical and seasonal factors. For instance, during economic downturns, people may drop out of the labor force entirely, only to re-enter when conditions improve. This can lead to temporary distortions in the reported rate. For example, if during most years retailers hire a lot more workers for the Christmas shopping season, then the BLS factors in the assumption of these workers being hired again this year, even if economic conditions cause that not to happen to the same extent as on average. Hence the nonfarm payrolls number is overestimated and the U3 rate is underestimated.
Geographical Disparities: Unemployment rates can vary significantly by region, with some areas experiencing higher unemployment than the national average. This can create pockets of hidden unemployment that aren't captured by the U3 rate.
Underrepresentation of Vulnerable Populations: Certain demographic groups, such as young people, minorities, and individuals with disabilities, often face higher unemployment rates than the general population. These disparities are not always adequately accounted for in the official statistics.
Labor Force Participation: An amalgamation of several of these factors above, the so-called labor force participation rate excludes individuals who have given up on job-seeking for one reason or another, thereby masking the true extent of unemployment. When discouraged or marginally attached workers stop actively seeking employment or retire early, they are no longer counted as part of the labor force, artificially lowering the unemployment rate. By making "the labor force" something other than all able-bodied civilian non-institutional adults, this distorts our perception of just how many people are involuntarily out of work. While it does make sense not to include certain people in the labor force -- full-time students, retirees, stay-at-home parents, incarcerated individuals, and the independently wealth -- this number has ballooned to include as many people as possible in order to distort the true rate of unemployment. In 1994, the BLS introduced a broader measure of unemployment called the U6 unemployment rate, which includes not only the officially unemployed but also marginally attached workers and those working part-time for economic reasons, but the media rarely reports this number. Moreover, even the U6 rate is misleading. The labor force participation rate is now as low as it was before women entered the labor force en masse.
Unemployment is a Trailing Indicator: Changes in the labor market tend to lag other economic conditions and leading coincident indicators. Unemployment data is typically collected and reported on a monthly basis by government agencies, like the BLS. This process takes time, leading to delays in reflecting real-time economic shifts. And as we saw above, inherent biases about how the economy ought to be doing can be erroneously factored into estimations meant to measure how the economy is actually doing, only to be revised later. Employers often make hiring and firing decisions in response to changes in economic conditions or business outlook, which are usually dependent on a consensus of such biased government reports. And even when they become aware that economic conditions are in fact deteriorating, employers may first reduce overtime, freeze hiring, or cut back on hours before resorting to layoffs. This can create a feedback loop of overestimating economic health well into a recession.
As a result of these factors, the nonfarm payroll reports and the U3 and U6 unemployment rates have limitations in capturing the full extent of labor market and general economic distress, arguably intentionally. It is never politically advantageous to oversee a declining economy and so the measures of economic health have successively overestimated economic vitality over time to benefit each new generation of politicians who want to have claimed economic success. And this applies to the Federal Reserve as well, who use the Phillips Curve to assess their policies vis-Ã -vis their dual mandate of managing inflation and unemployment. To gain a more comprehensive understanding of the employment and economic situation, it is important to consider these arguments above and to explore alternative measures so as to reconcile contradictions like how can we have historically low U3 unemployment and also have a negative savings rate, record credit card and auto loan delinquencies, and homelessness skyrocketing by 11% in the same year.
A better measure might instead be the employment rate, which is the total employed individuals divided by the total working-age, civilian, non-institutional population. The employment rate as reported by the BLS in August, 2023, was 60.4%. Inversely, the real unemployment rate (100 minus the employment rate) was 39.6%. That's a far cry from the reported headline U3 unemployment rate of 3.8%! And even several multiples of the U6 unemployment rate of 7.2%. In reality, nearly 4 in 10 able-bodied adults are not working. And some of them are losing their government benefits or having them reduced as a result of pandemic measures expiring. And some of the other 6 in 10 are working part-time, gig jobs, or otherwise not earning at their potential. And even those of the 6 in 10 who are fully employed, most have suffered wages declining relative to inflation, less bonuses and overtime, oppressive debt service costs, and possibly expiry of student loan forbearance and other benefits.
That's why the economy is diving headlong into recession even though the headline jobs numbers seem pretty decent. At least for now. But they're a trailing indicator.