Unemployment Rate is Higher than it Seems

Don’t believe everything you hear about the unemployment rate on mainstream media. To be clear, it’s not a conspiracy by the media to report an unemployment rate that looks better than it really is, it’s just that a deeper analysis reveals some trends to the inputs to the unemployment calculation that don’t look so rosy.

Both the labor force outflow and misclassifications can affect the unemployment rate. A misclassification is when survey takers might classify some workers as ‘employed but absent from work’ versus ‘unemployed on temporary layoff’. There might be other misclassifications as well – after all, survey takers are only human.

As for the labor force outflow, that’s when potential workers give up on looking for a job – they either retire, go into thievery (this is not reported by smart thieves), or otherwise disappear from the number of people that are either working or looking for work.

If we combine those two categories on top of the headline unemployment rate, the unemployment rate is much closer to 10%. That’s a far cry from the 6.2% reported. This means that it could be even longer before we get to full employment, which is good news for the Fed and it’s intention to keep rates low for the foreseeable future.

You see, inflation usually starts accelerating when the labor force is at full capacity and wages start to rise. As wages rise, companies increase prices to maintain profitability, etc. – leading to overall inflation, higher interest rates, and eventually, a slowdown in economic activity.

But good news for the Fed is not necessarily good news for the people who lost their jobs and are still looking. Let’s hope we continue to see improvements in the labor market and for those workers who stopped looking to reenter the labor force. That’s when we will know the economy is really back and that’s when we should really start worrying about inflation.

Unemployment Rate