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Well, things are finally looking up for the US economy. The unemployment rate (first estimate, they will revise it soon) for December was 8.5%, down from an estimated 8.7% in November, 2011. This, along with other good news about hiring and unemployment benefit filings all seem to confirm that we are making good progress toward recovery.
In this blog I want to briefly explain how unemployment data is collected and unemployment rates are calculated, since nearly every week someone in the media or government gets it wrong. I'll also discus some weaknesses of how it is measured, and why we should or shouldn't care.
The Bureau of labor Statistics in Washington, DC is in charge of surveying over 100,000 people each month in order to determine the unemployment rate. To simplify, suppose we want to estimate the unemployment rate for a small town. We would want to get a list of all of the households, and randomly select say, 100 of them. Suppose that a total of 200 people live in these households. The procedure for determining the unemployment rate is as follows:
First we ask all 200 people if they are at least 16 years old. Suppose 50 of our 200 are under 16; we throw them out of the survey.
Next, we ask the 150 remaining people "Did you work for pay last week?" The "for pay" eliminates housework, homework, and volunteer work. Suppose 90 of our 150 did.
Next, we ask the 60 (150-90) people remaining who said "No, I did not work for pay last week" one more question. We ask "Did you actively look for a job last week?" Actively means that you did something, such as call around, mail our your resume, fill out an application, or go into a business as ask if they are accepting applications. An example of something that is not active would be browsing through the "Help Wanted" ads in the newspaper, without doing anything. Heck, even I do that just for fun sometimes. Suppose 10 of our 60 said that they did actively look for work. The other 50 might be retired, full time students, house-husbands, or discouraged workers who have given up the search.
Our unemployment estimate comes from adding the 10 "active lookers" to the 90 employed people, to get 100 people in the labor market (working or actively seeking employment). 10 of the 100 are unemployed, for a 10 percent unemployment rate. This is currently a little higher than the 8.5% US rate and the 9.5% rate in my home state of North Carolina.
Some people don't like the method we use to calculate the unemployment rate, and I have my own problems with it. Some people don't like the fact that discouraged workers are not counted. Some people don;t like that the question asks "Did you work for pay", but not how many hours or for how much pay. I agree that this measure is not perfect, but as long as you know how it is calculated, then you know what it can and what it cannot tell us. [As a side note, we do collect data on underemployment (working PT when you want FT) and discouraged worker status]
The most important use is simply for us to be able to see if things are getting better or getting worse. And, thankfully, things are getting better. The US unemployment rate topped out at close to 10.1% two years ago. We still have a long way to go, but the trend is still slow, somewhat steady improvement, though there have been some bumps in the road. I am not an economic forecaster, but I am finally feeling more confident that we are on the right path. However, problems in the Euro zone could always come to bite us! Let's hope they can get themselves sorted out...
Additionally, the way we define the unemployment rate is pretty close to how most countries do it, so we can compare what is going on in the US to other countries. Just for fun, here are some other recent underemployment figures from other countries (from mid-to-late 2011, from various sources...)
Canada: 7.47%
France: 9.8%
S. Korea: 3.40%
Spain: 22.9%
Portugal 12.9%
Ireland: 14.1%
Brazil: 5.2%
Puerto Rico: 15.7%
Iceland: 7.1%
Japan: 4.5%
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