In this article, Mitt Romney notes that though it’s a positive sign for the unemployment rate to continue to fall (most recently to 8.1%) we shouldn’t celebrate until it reaches 4% or below, levels not seen since 2000. And that’s probably true – at 8.1% unemployment we are still DOUBLE the “natural rate of unemployment” that economists talk about. Also, it’s still a large number of Americans that can’t find work, can’t support a family, can’t consume goods and services that might create other jobs and can’t pay taxes that would help lower the deficit.
So 4% is a good goal. But that doesn’t take into account how you would get to 4% – hint, the trick is in the formula for how the unemployment rate is determined. At its simplest level, the unemployment rate equal to the number of unemployed workers out of the total labor force. But what exactly is an unemployed worker? And what is the total labor force? While this may seem like an obvious question – it’s actually far from it. Take a group of 10 adults, 5 of whom have full-time, paying jobs – you would think that the unemployment rate would be (5 unemployed)/(10 total) = 50%. But that’s not necessarily the case. An “unemployed” worker is defined as one that is willing, able and available to work AND who is actively searching for work. Lets say that out of the 10 adults, 2 are stay-at-home parents and 1 is ill and unable to work. These 3 people are removed from the list of unemployed AND the total labor force. So the unemployment rate of the group is actually 2/7 or 28.6%. Now say that those 2 had been looking for work, but were so downtrodden by the lack of available jobs that they simply stopped looking and are living on public aid. These 2 now do not fit the definition of an “unemployed” worker and so are removed again from that pool and the total labor force. So now what’s unemployment rate? 0/5 or 0% unemployment!! Mission accomplished!!
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But is that how you want to get to 0% unemployment? With people being so discouraged they drop out of the labor force? Hardly.
And you can take it a step further. Take those 5 people that are employed – say they are all attorneys (graduated from law school, passed the bar exam, maintain their licenses, etc). But just because they are “employed” doesn’t mean they are employed as attorneys. Perhaps one cannot find a job at a law firm (though she wants one) and instead works as a proofreader for a book company. Yes, she is employed, but she is “underemployed” – meaning that she is employed, but not in a manner that uses all of her skills/experience in the manner in which she would like to. Can low unemployment really be the goal if it means that a large number of folks are underemployed? Certainly not.
I think we need to take a more holistic approach to the unemployment rate – many of the factors that should be looked at are featured in the article. Unemployment rate is important, but it needs to be taken in context with the labor force participation rate (how many people are so discouraged they stop looking for work) and underemployment. And if that 8.1% is taken in the context of the lowest participation rate in over 30 years and near all time highs in underemployment (particularly in recent college graduates – many have taken positions that do not require any degree, let alone their’s), it’s clear that that isn’t really a cause to celebrate just yet.
For more information on how the unemployment rate is calculated, see this article (Wikipedia.com)