The Real Unemployment Rate: 16.4%

As of May 2009, the official unemployment rate is 9.4% . However, the real unemployment rate is 16.4% . If it seems hard to believe, check out the BLS’ numbers for yourself. More and more people are out of work each month. The jobless number is downright frightening. But why is the actual unemployment rate so much higher than the one reported by in the media as the “official” jobless rate?

The Bureau of Labor Statistics (BLS) actually produces six different unemployment numbers: U-1, U-2, U-3, U-4, U-5, and U-6. We are going to focus on two of those measures of joblessness:

U-3:  The official unemployment rate

U-6:  The actual unemployment rate

What is the difference between U-3 and U-6? Quite simply, U-3 dramatically understates the number of people who are unemployed. U-3 just leaves a bunch of people out of the calculation. Here are the people who are not included in the “official” unemployment rate:

  • Marginally attached workers. These are people who have given up looking for a job. They have looked in the past and would gladly take a job now, but they have simply given up looking. They are not counted because they have not looked for a job in the past four weeks.
  • People employed part time for economic reasons. These are people who have been forced to take a part-time job because they could not find a full-time position.

If you include the above-mentioned people, the unemployment number jumps from 9.4% to 16.4%. Unfortunately, it gets worse.

Yesterday I was told a story of a guy who used to make $70k interviewing for a $9/hour security guard job. I know another guy who was making $100k as a VP of operations who is now making $10/hour as a cook. I am sure that you have heard similar stories. Neither of these guys will ever have shown up in the unemployment numbers at any time because: 1. Neither guy was out of work for 15 weeks or longer, and 2.  Both got jobs. While these men did indeed get jobs, they are most certainly not employed to the extent that they were previously. This sad state that so many people are experiencing is not factored into the unemployment rate. So while the real unemployment rate is 16.4%, the actual situation is much worse.

Another group of people is excluded even from U-6. If you lose your job but don’t look for another one, you are excluded altogether. You are neither employed nor unemployed, so you don’t count. A good example of someone in this group would be a person who is over 55 but who isn’t ready to exit the work force. A good example would be a retail manager (an industry known to be age-biased). After being laid off, a 55+ former retail manager might simply downsize their lifestyle and move into an early retirement instead of face the rejection they know is coming if they attempt to look for another job in their industry. Even though such a person wants to work, they know that they are unlikely to get a job in the same industry, and they feel like they are too far down the road to start over in a new line of work. Because such a person does not look for another job, they are not included in any unemployment calculation — not even U-6 — which means that the actual unemployment rate of 16.4% is somewhat understated.

With the unemployment rate at 16.4% (or perhaps higher) , it seems clear that we are in a depression. If you compare the current unemployment rate to the infamous Great Depression, the numbers are frightening.  In 1930 — after the great stock market crash of 1929 — the unemployment rate was 8.7% (and back then they counted more people than does the current method). It took four years after the crash of ’29 for the unemployment rate to reach it’s apex of 24.9% when one in four Americans who needed a job was without work.

At 16.4%, we’re certainly too close for comfort to the all-time-high unemployment rate. Let’s hope things get better. In the meantime,  shame on the government for reporting unemployment as 9.4% when they know good and well that it’s at least 16.4%. And shame on the media for reporting the spoon fed U-3 unemployment rate instead of the actual U-6 unemployment rate that is displayed prominently and explained thoroughly on the BLS’ own website for any reporter to see.

by Wade Young