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Unemployment numbers, like all good statistics, can be deceiving.
Sometime next week, the Bureau of Labor Statistics will release the unemployment rate for February. No doubt, all the major news outlets will do as they did last month and prominently feature that number in headlines and articles.
Before that happens, it’d help to understand what that number actually means.
Hereâs the crash course: The Bureau of Labor Statistics has six different ways of measuring un- and under-employment.
When journalists and policymakers cite the âofficialâ unemployment number, theyâre looking at the third measurement, which is sometimes called U3. That number includes those jobless people who are available to work (i.e. not students) and have actively looked for a job in the last four weeks.
That official U3 measure is the one used to calculate everything from unemployment insurance expenditures to the âstress testâ that banks will face in the next couple of weeks. And itâs the measure used by everyone in Washington including, say, Federal Reserve Chairman Ben Bernanke, who estimated earlier this week that unemploymentâwhich rose to 7.6 percent in Januaryâis likely to rise a bit more this year, topping out between 8.5 or 8.8 percent.
So itâs the most important measure.
But a lot of peopleâincluding Paul Krugman and a handful of less-famous academics (PDF)âsay the U3 does a bad job representing the state of the labor force in America, since it doesnât include those workers who havenât looked for a job in the last month but say they want one (âdiscouragedâ or “marginally-attached”(PDF) workers), or those who pick up part-time hours, but canât find a full-time job due to the economy.
These folks argue that the broadest measure of unemployment (U6) is better, since that measure gives us a better idea of how many people would be workingâor would be working full-timeâif the economy were better.
A front page New York Times story mentioned the problem earlier, saying that while unemployment for January was 7.6 percent, âthat number understated the weakness in hiring because hundreds of thousands of people dropped out of the labor force over the last year. On top of that, 3.1 million additional people were working part time because they could not find full-time jobs.â
A Financial Week story also noted a Merrill Lynch study conducted by economist David Rosenberg, indicating that the âactual unemployment rateâ (as opposed to the âofficialâ rate) this month has hit 1994 levels:
As Mr. Rosenberg explained, what the official unemployment rate misses is the vast degree of âunderemploymentâ as companies cut back on the hours that people who are still employed are working. Those hours have declined 1.2% in the past twelve months.
The BLS still counts people as employed if they are working part-time, but the number who have been forced into that status because of slack economic conditions has ballooned nearly 70% in the past year, according to the studyâŚ
Thatâs pretty significant. While official unemployment is at 7.6 percent, that Merrill Lynch study would put it at 13.9 percent.
The Wall Street Journal blog Real Time Economics noted the disparity in unemployment statistics too, warning that the gap between the numbers is probably going to get worse:
Because itâs a relatively young data series, the U-6 doesnât get much attention beyond researchers. But it may deserve more focus over the coming year as the labor market continues its purge. Many employers are still focused on cutting jobs quickly to get through this downturn, pushing job-seekers aside for an extended period. After long searches â weâre in the fifteenth month of this recession â some job hunters are likely to give up and wait out the recession. Without the broader unemployment rate, many of them wouldnât be counted.
We didnât always measure unemployment like we do now. According to a Reuters , the government rejiggered the official unemployment rate forty years ago, excluding from the labor force those jobless people who had not actively looked for work in the past year. That, of course, had the effect of making unemployment appear lower almost overnight.
In 1994, the BLS redefined the official unemployment number again, excluding people who had not actively looked for work in the previous month. That change in definition is particularly important because we’ve seen lots of comparisons between unemployment today and unemployment in the early ’90s. But, since the definition of “unemployment” has changed in the meantime, it’s an apples and oranges situation.
Unemployment can be tricky to measure, and itâs an easy statistic to either accidentally or deliberately misconstrue. The media have to be on their guard. Next week, when the BLS announces the unemployment numbers for February, the media must be careful not only to give their readers the statistics, but also to make sure their readers understand the context behind those statistics.
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