On the Reported Unemployment Rate

by Don Boudreaux on February 9, 2011

in Data, Work

Over at the New York Times’ ‘Room for Debate’ feature, Tyler Cowen today writes that

The American job market is also spectacularly bad, with the high measured rate of unemployment concealing an even higher rate of underemployment or simple withdrawal from the labor force.

In a very different context, the Denver Post‘s brilliant columnist David Harsanyi today mentions, in an otherwise superb essay,

the putrid job situation — kept at an illusory 9 percent through an exodus from the job marketplace.

I agree that America’s job market today stinks.  But I am uneasy by this talk of the current unemployment rate being an underestimate of the true level of unemployment.

At some level this claim that the reported rate is an underestimate might be defensible.  But be careful before jumping to this conclusion.  Here are some questions:

- Is today’s 9.0 percent official rate of unemployment not comparable to past times in U.S. history when the official rate of unemployment was at or near 9.0 percent?

- Does a high official rate of unemployment underestimate ‘true’ unemployment only when the unemployment rate has been high for some number of months?  For any given reported official rate of unemployment (such as January 2011′s 9.0 percent), does the extent of underestimation increase if the reported rate has been rising over the past few months, and decrease if the reported rate has been falling?

- Isn’t it true that nearly every adult between the ages of 16 and 96 who is not in the job market during normal, and even booming, economic times voluntarily keeps himself or herself out of that market because he or she is sufficiently discouraged at the prospect of finding a job that would pay well enough to warrant searching for work and, if finding it, actually working in the market?  (The stay-at-home young and healthy wife of a millionaire professional sports star would surely enter the job market if she believed that she might land a job that pays her $100,000 per hour.)  Is there any non-arbitrary way to distinguish ‘discouraged’ workers during normal times from ‘discouraged’ workers during recessions?

- Most importantly, when (by whatever measure) the jobs-picture brightens, will the reported unemployment rates during those ‘brightening’ months over-estimate the level of unemployment as formerly discouraged people become sufficiently encouraged to re-enter the job market in search of employment?

I certainly do not mean to suggest that the official reported unemployment rate is perfect or unable to be improved.  But it strikes me as too ‘iffy’ – and sometimes even too politically convenient – to conclude that the ‘true’ rate of unemployment is ever anything other than the official reported rate.  That official rate, for all of its faults, is the one we’ve used in the U.S. for years and we either ditch it for a new and better method of measurement or we accept the reported rate as is – again, despite its known imperfections.

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