Who Are the Unemployed?

At a business meeting we had an economist  share his views of the economy.  One comment he made was that only a minuscule portion of the unemployed were on government assistance.  I found this comment curious and certainly counterintuitive.

As it turns it is not so easy to measure the unemployed.  The data is based on two questions:

1. Are you currently unemployed?
2. Are you currently looking for a job?

This measurement does not measure those who are unemployed but no longer looking.

It does not measure the Labor Force Participation Rate (LFPR).

In spite of its imperfections, this is probably a fair measure. We certainly do not want to measure students and the retired. But what of the rest who are younger and capable of working and who have decided not to look for a job or participate in the labor market?

For the unemployment rate to be meaningful this means that when the unemployed person answers the phone and is asked whether he is looking for a job he is honest in his answer that he is not. One would expect a fair number to lie about this question, since their benefits usually require that they at least go through the motion to look for a job.

Economists use a broader measure called “U6 unemployment which includes some of the discouraged workers on welfare who have given up.  It’s sitting at 14% or so.  This number, however, is not a good number to use for policy decisions because it is too volatile and would lead to silly and overly dramatic policy choices. This is similar to why we use core CPI for inflation (removing volatile food and energy prices). “[i]

It is important that they use a consistent measurement because the critical information is the change in the number.  But it is important to realize that the labor statistics are sometimes challenging to get and that a single statistic only tells a part of the story.

To those like me who would believe that the generous unemployment benefits have acted as an incentive to increase unemployment, it would be more accurate to state that these benefits may have affected unemployment less but that they still affect the labor participation rate.

The labor participation rate is improving, but much more slowly and less dramatically than the unemployment numbers would indicate.

tips to Dr. Greg George, Economics professor at Macon state College for this clarification. Greg is also the Director and founding partner of the Center for Economic Analysis (CEA) housed in the School of Business at Macon State College.