Economics, U.S. Economy

Why the official 8.3 percent unemployment rate is a phony number—and what it means for Obama’s reelection

The January jobs report is out and it seems pretty strong, at least superficially. The unemployment rate fell to 8.3 percent from 8.5 percent, the lowest rate since February 2009. And the economy added 243,000 jobs, the most since April 2011.

But does anyone believe an “official” unemployment rate of 8.3 percent really gives an accurate picture of the U.S. labor market? Even though the unemployment rate fell, so did the labor force participation rate (as more Americans became discouraged and gave up looking for work). Here’s what that means:

1. If the size of the U.S. labor force as a share of the total population was  the same as it was when Barack Obama took office—65.7 percent then vs. 63.7 percent today—the U-3 unemployment rate would be 11.0 percent.

2. But let’s not go all the way back to January 2009. In January 2011, the unemployment rate was 9.1 percent with a participation rate of 64.2 percent. If that were the participation rate today, the unemployment rate would be 8.9 percent, instead of 8.3 percent. As an analysis from Hamilton Place Strategies concludes, “Most of the shift of the past year is due not to the improvement in the labor market, but the continued drop in participation in the labor force.”

3. Now, to be fair, some of the decline in the participation rate is aging Baby Boomers dropping out of the labor force. But taking that into account still doesn’t get us very far, as HPS notes:

Demographic projections expect that participation rate to be at 65.3 percent. If that full participation rate is the goal, our economy is “missing” 3.8 million workers, up from the 3.4 million we noted in the white paper. The unemployment rate in that context has not budged at 10.4 percent.

4. Then there’s the broader, U-6 measure of unemployment which includes the discouraged plus part-timers who wish they had full time work. That unemployment rate is still a sky-high 15.1 percent.

5. If the participation rate does level off at its current rate, according to HPS, the economy would need to generate 231,000 jobs per month to get below 8 percent unemployment by Election Day. If the participation rate continues its downward slide, however, that number would be much lower—perhaps as low as 131,000 jobs a month (see below chart). But such a decline wouldn’t necessarily be good news.

Why is that? Because the unemployment rate would be falling because the economy remained weak with not many jobs created. That also means weak income growth, which is even more influential on presidential election results than the unemployment rate. If people don’t sense their own economic situation improving very much, it won’t matter what some distorted statistic from a government agency says about the economy. Or what Obama says, either.

One of the most accurate election forecasting models doesn’t even look at the unemployment rate. It looks at per person GDP growth, which correlates with income growth. If you plug a 2 percent GDP forecast for 2012 into the model of Yale’s Ray Fair, the algorithm predicts a close election, but still an Obama defeat with the incumbent president getting just 47.8 percent of the two-party vote.

Bottom line: The unemployment rate is dropping because economic growth continues to be so anemic that nearly 4 million Americans have quit looking for work and have been disappeared by the Labor Department. This still isn’t much of a recovery.

49 thoughts on “Why the official 8.3 percent unemployment rate is a phony number—and what it means for Obama’s reelection

  1. I agree with this article because I have been unemployed and looking for work since 10/2010. The market is VERY tough and the longer a person is unemployed the harder it is to be hired! Employers don’t seem to want to hire people who have been unemployed for a longer period of time. People who are employed are more easily able to change jobs. The other issue is baby boomers are having more trouble finding work. I am a baby boomer and have baby boomer friends who are also out of work and having trouble finding work! Some of those friends have decided to stop looking and file for social security early. This is not a good trend to have people applying for SS early because unemployment benefits expired and they can’t find work!!

  2. Well it is indeed a miracle. Obama with his friends at BLS have managed in just one month vaporize 1.2 million from the labor force. The labor force increased from 153.9 million to 154.4 million, the non institutional population increased by 242.3 million meaning, those not in the labor force surged from 86.7 million to 87.9 million. Keep vaporizing the labor force participation rate and he can have the unemployment below 5% in a matter a months with this type of math.

  3. Kind of an ingenious way of calculating things. If you give up looking for a job in despair, poof, you are no longer unemployed. This could work for health insurance also. Give up trying to obtain health insurance due to a pre-existing condition? Poof, you are not not considered to be uninsured. have an incurable disease? Poof, you are no longer considered sick…..

    • BLS publishes a series of “alternate” unemployment measurements, including various categories of “discouraged workers.” All of the measurements show a decline in unemployment of about 1% in the past year.

  4. Two questions–
    1. Do we know that the Compute Vote Predictions include updated demographics? Because demographics have been getting more liberal in this country.

    2. Since most people are completely unaware of the discouraged workers issue, and the Department of Labor handles the unemployment number– is there any way that they could mess around with the unemployment number to make Obama look good for the election?

  5. So things really aren’t significantly better than they have been for a quite a while. Statistics are massaged to paint as rosy a picture as possible. However, under that rose bush is what makes roses grow best: Manure.

    Of course this analogy goes only so far. Manure has value in a garden and real roses are beautiful. Yet there’s nothing beautiful about this employment picture.

    Would to God we had someone as president who was REAL. That miserable SOB we call president is nothing but a Chicago thug who’ll lie to your face as he robs you blind.

    • A year ago, it was 9.3%. A net 2.1 million jobs were created in the past year (that’s an average between the household survey of +2.3 million and the employer survey of +1.9 million). I’d say 2 million people got good news, anyway.

  6. This is astonishing! Maybe you could go back and revise the Bush years as well, and calculate what affect the recession, deficit spending, launching of two wars, enactment of an unpaid entitlement addition to medicare, two stimulus payments to everyone in the country, and two major tax breaks for the wealthy had on the economic well being of the country and how many jobs were subsequently vaporized? thanks to the continued mismanagement of the economy by the Republican party and their “borrow and spend” approach to bankrupting the United States, its amazing there are any jobs left, let alone being created by an Administration hobbled by the incompetence from the prior Administration.

  7. The problem will remain: will the people do normally don’t pay attention get the message, or will they believe the $1,000,000.000 propaganda message of the Obama Reelection campaign. Will the lie be exposed or believed? On this alone hangs the future of our families, our country, in fact even the world economy will suffer if Obama stays in office. Talk this up with everyone, the message needs to get out. We need a change in leadership.

  8. Part of me wants to laugh at this, and part of me wants to shed a tear for what has become of the American Enterprise Institute.

    At one time, the AEI was renowned for the quality of its research, and the ability to explain it in terms accessible by an intelligent layman. Back in the late 1970s, and throughout the 1980s, I subscribed to several AEI publications. Then they disappeared, and the AEI became a propaganda outfit.

    Now, to Mr. Pethokoukis and his pathetic attempt to downplay another positive employment release.

    Why the official 8.3 percent unemployment rate is a phony number

    There is nothing “phony.” The statistic was produced using Bureau of Labor Statistics methods that have been in place for a long time. The BLS is not partisan, and their numbers are not “phony.” It is a reprehensible lie to say otherwise.

    But does anyone believe an ‘official’ unemployment rate of 8.3 percent really gives an accurate picture of the U.S. labor market?

    Strawman alert! No one, including the BLS, says that any single employment number gives an “accurate picture of the U.S. labor market.” The BLS collects and distributes a whole smorgasbord of employment data. They are best used together, not in isolation.

    If the size of the U.S. labor force as a share of the total population was the same as it was when Barack Obama took office—65.7 percent then vs. 63.7 percent today—the U-3 unemployment rate would be 11.0 percent.

    So what? No one is arguing that the 1990s are back. If the Obama administration was trumpeting these numbers as evidence that everything’s okay now, you’d have a point. But they are not doing so.

    Most of the shift of the past year is due not to the improvement in the labor market, but the continued drop in participation in the labor force.

    There were 2,345,000 million more jobs in January 2012 than there were in January 2011. That gain is larger than the contraction of the labor force.

    Then there’s the broader, U-6 measure of unemployment which includes the discouraged plus part-timers who wish they had full time work. That unemployment rate is still a sky-high 15.1 percent.

    You forgot to point out that U-6 has declined by a full percentage point in the last year, on a seasonally adjusted basis, and by 1.1% on an unadjusted basis. Since September, U-6 is down by 1.3% on a seasonally adjusted basis. Yes, these numbers are “sky high,” but there is no question that they’ve declined in the past quarter.

    The bottom line is that the past quarter has been a positive one on the employment front, and that we’re better off than we were a year ago. Moreover, if one looks at the mix of government and private employment, the news is better yet: These gains have been made at a time when state governments have been slashing payrolls.

    It’s not the BLS employment rate that’s “phony.” What’s “phony” is the American Enterprise Institute’s willingness to distort facts and smear the BLS to serve its partisan agenda. No one is saying that the U.S. economy is out of the woods yet, but it’s “phony” to imply, as AEI has done, that we’re not seeing improvement.

    To head something off at the pass: I do not work for the government. I never have. All of my income is derived from private, profit-making enterprises that are a good deal more honest than Mr. Pethokoukis and his partisan employer.

  9. Sadly, this article is not correct. If you look at the employment situation release

    It details that there is a regular annual adjustment to the report that changes the population number used for the survey. Look at table C for details.

    GayleH is correct about the issues relating to long term unemployed and baby boomers.

  10. In addition 160,000 legal foreign workers (H1-B visa holders and the like) are added to the U.S. population on average each month. No one has a clue how many illegal workers are added. Even if there were no illegal workers, the net gain of jobs per month would be 243,000 – 160,000, a total of 83,000 jobs per month. That would not be enough to even maintain the current unemployment rate.

  11. Not a very good analysis I think… Political science research shows that what matters the most is the trend, not the rate. In other words, you are more likely to be elected if the unemployment rate is 8% and going down than if it is 7% and going up.

    This article needs to be rewritten to take this into account.

  12. It’s sad that we are all hoping for the economy not to recover until November, so that the POTUS could change.

    You can deny it all you want, you can yell, call me names, and call me ignorant all you want. But, deep down inside, you all know that is EXACTLY what you all are hoping for. Hoping for the continued misery of living, breathing, and struggling human beings until November.

    And, that is just plain sad.

  13. So much buzz the last few days is about how Romney “isn’t concerned about the poor.” But who is it that’s denying their existence, telling them that things are getting so much better? Who is cynically presenting a hideous jobs picture as being a merely terrible jobs picture for the sole purpose of getting reelected? The only thing about the poor that Obama cares about is whether they vote for him.

  14. I have to wonder if the people compiling the employment statistics are tilting the numbers to favor Obama. I worked in the shipbiuilding industry for many years. Navy shipbuilding contracts had price adjustment clauses based on the movement of the BLS indices for labor and material. On close inspection it was found that BLS was tilting the numbers to favor the government. Government employees have their political views like everyone else. My guess is that most of them favor the party which favors big government

  15. Lets go down the Emp Sit report for January. Look at the unemployment rates for Black or African Americans. It fell 2.2% in a month!!! Funny that when you look at the participation rate for this segment, there isn’t that great of a change. And when you look at the “not in labor force Black or African American”, there hasn’t been a great change over the last year.

    There are lots of problems with this report.

  16. “Now, to be fair, some of the decline in the participation rate is aging Baby Boomers dropping out of the labor force. “

    You would think this is reasonable … but you clearly didn’t check it, because it is false. According to BLS data, those aged 65+ were in fact MORE engaged in the workforce (with participation rate rising from 22.6 to 22.9 year to year), and MORE likely to be employed (with unemployment rate falling from 7.1% to 6.3%).

  17. Let’s hope Mitt Romney, who isn’t, I suspect, going to point out directly the realities discussed in this article, is only doing so because it sounds like “sour grapes”? But let’s hope he at least does so by pointing out that the official U3 rate doesn’t take into account the despair of those who aren’t looking, and the part-timers, and the crappy jobs that are replacing the good-paying jobs–or something…

    • BLS publishes several “alternative” measures that take “discouraged workers” into account. All of the measures show a decline of about 1% over the past year, and an especially pronounced improvement since September 2011. American Enterprise Institute seems to hate the good news, which is their right, but the facts are the facts.

  18. You give the BLS and Obama Regime too much credit. The babyboomers are not leaving the workforce, they are re-entering it due to inflation and hits on their 401K’s.

    Therefore your 11% number should be 11.5%, although this could be a part of the underemployed number of 15%, as most of these people are probably very skilled workers who are wal-mart greeters or part time teachers.

    • ZeroHedge is a bunch of permabear wackos. They cherry picked a single annual adjustment, ran it through a calculator, and ignored all of the other data that BLS produces. If you want to believe that site, go ahead. You deserve the delusions you’ve got.

  19. I agree with the article because I am a gullible right-winger who will pounce on any random half-baked BS conspiracy theory to stoke my endless and baseless hatred of the president.

  20. It’s not a “phony” number. It is what it is. “Unemployment” and “labor force” are terms that by necessity have definitions. People who don’t fit the long well-established definition of “labor force” are not counted in the labor force, and are therefore not by definition “unemplyed”. Pretty basic.

    The government is not hiding anything or lying — the BLS helpfully publishes all this information for all the world to see, which is the only reason you’re able to write this blog post.

    You are, btw, simply mirroring all the idiotic stuff said by anti-Bush types 5 years ago, including the obsession with how many jobs must be created per month in order to lower the unemployment rate (a guess which is always invariably inaccurate).

    I for one think it would be both stupid and dishonest for the government to put out an “unemployment” rate that includes people who have jobs. Um, do you not see that?

    Further, the whole apparatus of unemployment reporting isn’t here to serve idle curiosity — it exists only to support and inform government action. I.e., we need to know when some non-working person needs help and sympathy from society, as opposed to some non-working person who does not WANT to work at this stage in their lives and so is not a problem.

    That’s why someone who has not done anything at all to find a job in some weeks is not included in the labor force and so is not “unemployued”. Again it makes sense — should society really organize itself to spend its resources assisting someone who literally won’t help themselves by doing ANYTHING AT ALL to look for a job in a month?

    Exactly WHY x number of adults are not in the labor force — I don’t know and you don’t know. That is, in fact, unknowable. If you asked, many would lie. That’s not something an Economist can count. Any estimate of “discouraged workers” is a wild guess based on people lying in answer to a survey question.

    • Your arrogance is only surpassed by your ignorance,to speak for anyone else because you are completely certain of their choices and decisions is shameful for any fellow member of a society. Please discontinue this type of self-delusional behavior and find some professional help for your lack of character.

    • KevinF, you’re absolutely correct. Not that it will matter to the American Enterprise Institute, which long ago dropped any pretense of objectivity, even with respect to hard facts. For them to publish a screed that called the BLS release “phony” is an outrageous lie, but we’ve been in a long season of outrageous lies.

      The BLS numbers are so easy for ideologues to misrepresent. They publish two surveys, one of households and the other of employers. Each is presented in seasonally adjusted terms, and in raw unadjusted terms. And then the BLS also publishes alternative measurements that take various categories of “discouraged workers” into account. It is very easy to misrepresent the data by comparing apples and oranges, as this AEI article has done.

      No employment or unemployment number, or series of numbers, can be regarded as “correct” or exact. But they are fairly reliable indicators of trends, especially when the various series point in the same direction. That’s the case now, and has been throughout 2011, as the economy has slowly turned upward.

      Oddly enough, the other day on the campaign trail, Mitt Romney acknowledged it, saying that it’s a fact that the economy is improving. He gets it. Naturally, he can be expected to argue that it should be getting better faster. But he’s not denying the facts like the American Enterprise Institute is, or like many Democrats did as the economy improved during the Reagan years.

      Poor, poor AEI. Once you throw away your reputation, it’s awfully hard to get it back.

  21. Republicans need a nominee that Obama can’t lie to and get away with it. Romney is the perfect sucker and Obama could lie to God and get away with it, so I see a problem.

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