What Do Unemployment Figures Really Mean?

David Howden
David Howden May 25, 2016

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Politicians often quote unemployment data, especially around elections, in order to gain votes. But what do these figures mean?

Does the term “unemployed” refer to everyone who doesn’t have a job, including students and stay-at-home mothers, or only to those who are jobless but are actively seeking work?

Professor David Howden of St. Louis University (Madrid campus) defines unemployed and explains how to interpret this data.

Also on today’s show, is a discussion of mutual funds and discusses mutual funds and when they should or should not be used in cross-border investing.

Find out how you can take Doug’s upcoming investing course for free by simply sending Doug your biggest financial: doug@profile-financial.com

Watch The Truth About Unemployment on YouTube.

Read the Transcript

Interview with David Howden

David Howden, professor of economics at St. Louis University at the Madrid Campus, discusses unemployment. What do unemployment figures really mean? Do they accurately reflect the situation in the labor market?

Douglas Goldstein: David Howden is a professor of economics from St. Louis University at the Madrid Campus.

One of the topics that people talk about all the time is unemployment. Those on the right say “Well, the numbers are not really as low as you think because many people who are out of work have stopped trying. And the people on the left say “We’re down to the 5% level.” How do we know what’s for real?

David Howden: The unemployment figure, when you look at it, is a little bit hard to understand just by the nature of what you’re trying to measure. For example, if you were to look at whether T-shirts are being used or not used, that’s easy because if you’re wearing one, it’s used and if you’re not, it’s unused. But with work, we decide in many instances whether we want to have a job or not. It’s not sufficient to just say “Okay, we’ve got these people working, they’re employed and these people not working are unemployed.” Some of those people who are unemployed might be so for their own reasons – like students attending school or older people enjoying retirement. So when we look at the unemployment figure today, it’s a bit on the low side; it’s around 5%. Some folks are saying “I know all sorts of individuals who don’t have a job. Mainstreet is not doing as well as figure would lead me to believe.” These people are trying to reconcile what they see with their eyes and what they’re experiencing with the actual low number.

What is the True Definition of Unemployment?

Douglas Goldstein: Explain to me then how can we get a real answer. Would it be a good idea to interview a thousand or ten thousand people and see how many work?

David Howden: In the states, the Department of Labor does interviews. They ask, “Do you have a job or not?” If you don’t have a job, they need to decide whether you would like to have one or whether you’re out of the labor force. Another important factor studied is what percentage of the population is actually working or would like to be working. In other words, what is the labor force participation rate? And just to give you a feel for this, as recently as the year 2000, about two thirds of Americans either had a job or wanted to have a job. Today we’re down closer to 60%. So there’s been these exits from the labor force where many people who use to be included in it are not anymore and, of course, because they’re not included in it, when we measure the unemployment rate, there’s lots of people who don’t have a job but there’s also many fewer people who would like to have a job – and that’s what pushes the unemployment rate down. Let me give you an example to clarify a little bit.

If you are a stay-at-home mother and you’re doing that of your own volition – you want to stay at home and you don’t really want a job, you would not be included in this labor force statistics even though you don’t have a job. You’re not included in the labor force and you’re not counted as being unemployed. Or, let’s say in the recession back in 2008, you lost your job. You were 57 years old, pretty close to retirement, and you just decided to retire early. You would then have been counted as outside the labor force and even though you didn’t have a job, America – at least the Bureau of Labor Statistics – would not have said that you were unemployed.

Douglas Goldstein: Is that because you would have hit the age of 57?

David Howden: It’s not because of the age, it’s to do with the fact that that person had exited the labor market and was not really looking for a job.

Douglas Goldstein: So that would go back to the first question. Just ask people two questions: Do you want a job? And if yes, are you working? Would that give us a better number?

David Howden: It could except there are different reasons for the answers. There are some people who aren’t working because they don’t want to work, like somebody who retires early. And then, there are people who aren’t working because they’ve just given up all hope of ever finding a job.

Douglas Goldstein: Is that a big number?

David Howden: It’s quite sizable after a recession. There were many people who lost their jobs; a lot in the construction industry in particular. Jobs were so hard to come by that these groups of people just gave up completely and now they’re outside of the labor force. They don’t have jobs. They’re the forgotten statistic because they don’t get counted given that they’re not looking for jobs anymore. They’ve just given up hope.

Douglas Goldstein: You hear in the media – whether from the left or right, complaints against one politician or another. It seems that the statistics being used about unemployment are not comparing apples to apples. As a voter, let’s say, if I want to decide which party is most likely to create more jobs so that people who want to work can work, how can I make that determination?

David Howden: I wouldn’t look at the unemployment rate because it excludes all of these people, like the discouraged worker cohort, who have given up all hope of finding a job. Just to give you the scope of this, in the year 2000, there were about 68 million Americans not included in the labor force. Today, there are almost 100 million Americans not included in the labor force. These are people who have exited because they’ve given up hope that they’re ever going to find a job and they don’t want to put up with the pain and difficulty of getting rejected over and over again.

How Does Population Growth Affect Unemployment?

Douglas Goldstein: So we are not just talking about early retirees. The population in America has also increased in recent years. How does that affect the job market?

David Howden: Right. Over the last 16 years the numbers of unemployed have been going up along with the rate of population growth but a lot of this unemployment number consists of people who have simply given up hope of finding a job.

Douglas Goldstein: There are so many unemployment numbers being discussed. How can we know what those numbers actually are other than just sort of on an anecdotal level?

David Howden: The truth of the matter is when you look at unemployment, there are two figures that are important to you. There’s the unemployment rate and that tells you how many people have a job or would like to have a job but don’t actually have one. So the unemployment rate today of 5% tells me that 5% of all people who would like to be working cannot find a job. However, there is this whole other group of people who don’t get counted in that statistic. These are the people who don’t participate in the labor force and thus they’re excluded from that figure. So earlier I told you about the labor force participation rate and that tells me what percent of the population is actually looking for work. Right now we’re down around 60% which is a decline of nearly 10% over the last two decades. Those people have just either exited the labor force because they’re retiring early, the job opportunities for elderly people are not that great or a lot of younger people can’t get their foot in the door with companies and can’t get started – or they’re staying in university longer so they’re not participating. Or, some people have just given up hope of finding a job altogether. So you need to look at these two figures to see how many people are or are not actually working. That’s the unemployment rate. And, how many people out of the whole population want to be working or aren’t working and that’s the participation rate.

Douglas Goldstein: Is there any scientific way of measuring participation?

David Howden: Yes absolutely. Bureau of Labor Statistics does telephone surveys and they ask “Do you have a job or would you like to have a job? And if you answer yes to either of those questions, you are participating in the labor force and that’s how we get the figure today of around 60%.

Douglas Goldstein: How many people say “no” who legitimately are retired or real students or real housewives or house husbands who don’t want to be working?

David Howden: That’s the difficulty but I’ll tell you we can break up this figure into smaller subgroups. One important one is the prime working age subgroup. This we define as 25-65 years old because, I don’t if you’re like me, when we hit 25 and hopefully until we’re 65 we’ll be working continually through that period. And right now, there are 4% more people from that group who are not in the labor force, who are not working or don’t want a job than there were 10 years ago. You could summarize this as saying 4% of people who normally in the past would have been working have dropped out of the labor market completely for whatever reason.

Douglas Goldstein: So if we think about people aged 25 to 65 – if 95% of them are working today, you’re saying that 100% of them were working 10 years ago?

David Howden: Not exactly. But working or would like to be working. So, in other words, in the labor force. They either had a job or they would like to have a job. Statistics say that there are 4% or 5% fewer people period in the labor market today than there was 10 years ago.

Douglas Goldstein: But that doesn’t prove that they are the discouraged workers. It just could be that they retired or they’re in school longer because they want to get a better job and they realized that education is the only way. I don’t understand how we can conclude that unemployment is secretly worse than everyone knows when there are so many factors that could be built in to this number.

David Howden: That’s the difficulty with it and that’s what the statistic has a hard time measuring. So there are a lot of older workers, let’s say 55 to 65, who are just deciding to retire a little bit earlier than they did in the past, so they’re excluded from the statistic. You would probably think that that type of unemployment is okay. Ideally, nobody would ever have to work. This would kind of be the ideal situation that somehow life would just take care of itself for us. So to say that we want the lowest unemployment rate possible, I don’t think that’s an entirely correct statement because preferably, I’m sure you’re the same as me, I’d much rather not be working. I like my job as much as an ex-guy but I’d much rather not be working and be unemployed as long as I could be taken care of someone So we’ve got these older workers and they’ve exited the labor force some of them for good reason. I mean there are some people who are financially sound enough that they can afford to retire earlier than was the case in the past. There’s also a lot of older workers who lost their jobs in recession, they had trouble landing on their feet and getting a new job and they retired early but not of their own volition. They would’ve like to have gotten a job but at age 57-58, if you lost your job, it’s tough finding a new one or it’s tough finding somebody to take you on for only a couple of years. So at that end age group, we end up with difficulties and then at the young end of the scale, we also have difficulties because if you just look at the progression of the American economy over its whole history, increasingly the demands, the educational demand of your average worker have increased and this means that more and more people have been going to university or college or community college in order to get the skills they need for the workforce. Well that means that at a younger age, they’re not in the workforce, they’re studying. So we’ve got all of these younger people and some of them are unemployed because they’re pursuing their education and they’re okay with this but that’s also making it appear as though many more people are unemployed as there was in the past.

Douglas Goldstein: How can people learn more about you and the work that you’re doing?

David Howden: I blog frequently at the Mises Institute of Canada and you can find that at https://www.mises.ca/

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