Saturday, December 6, 2008

Unemployment, Underemployment, and Non-Farm Payrolls

Source: BLS release, December 05, 2008, Page 19

Don't be fooled by the headline unemployment figure, as it is a misleading indicator of the overall employment picture.


The headline unemployment figure, U-3, does not include marginally attached workers (which includes discouraged workers) nor does it include those who are employed part time for economic reasons nor does it include the underemployed.

Marginally attached workers are persons who currently are neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime in the recent past.

Discouraged workers are marginally attached workers who have given a job-market related reason for not currently looking for a job.

Part time workers are: persons employed part time for economic reasons are those who want and are available for full-time work but have had to settle for part-time work.

In other words that former accountant next door who now works 20 hours a week at Starbucks, is considered employed under the headline unemployment figure, even though he is clearly both severely underemployed and only working part-time.

The airline mechanic who was laid off and now changes oil at your local Pep Boys every weekend to make ends meet is also considered employed in the headline figure.

The ATT engineer who now works as a "consultant" is also considered employed in the headline figure.

A much better measure of the true employment health of the nation is U-6, which includes discouraged workers, marginally attached workers, and those employed part-time as a result of economic conditions. Unfortunately, no figure exists which also includes underemployment (such as the accountant working full time as a barista), probably because it would be difficult to accurately calculate.

The U-6 unemployment figure, which encompasses those who are discouraged, marginally attached, or part-time due to economic conditions, gives us a better clue as to what is happening in the labor market.

In November 2007, for every 100,000 members of the labor force who were employed, there were 4,700 people out of work (the headline rate of 4.7%). There were also:

4,700 + d
------------ = 0.049
100,000 + d

d = ~200 discouraged workers (workers who want a job but have given up and gave job market conditions as the reason)

4,700 + d + m
---------------- = 0.055
100,000 + d + m

m = ~800 marginally attached workers (600 marginally attached workers not in the discouraged workers subcategory, they gave 'personal' reasons as the reason for giving up, 200 in the discouraged workers category who gave job market conditions as the reason for giving up)

4,700 + d + m + p
------------------- = 0.084
100,000 + d + m + p

p = ~3,000 workers doing part time work due to economic conditions

Given the 154,000,000 people in the labor force, approximately 7,200,000 were unemployed, 300,000 were discouraged workers, 1,200,000 were marginally attached workers, and 4,600,00 were working part time due to economic conditions.

One does not actually have to work backwards from the headline percentages, which inevitably leads to some rounding errors and imprecision (unemployment figure goes only to the tenths) as the BLS kindly provides detailed actuals in the release, which I've summarized in a convenient table (I'm a big fan of visuals).

There are three million more people in November 2008 compared to November 2007 who are headline unemployed. However, examining the data, it becomes readily apparent that there are many more workers in November 2008 compared with the same time last year who are either discouraged or have been forced to replace full time work with part time work. In fact, there are seven million more people in November 2008 compared to November 2007 who are either headline unemployed, discouraged workers, or replacing full-time work with part-time work due to economic conditions. That is absolutely disastrous.

Worse, it is more likely than not, though there is no BLS measure or data out there that I know of for job quality, that there has likewise been an increase in the number of people replacing their prior employment for which they were trained for with unrelated jobs (think along the lines of VP Dick Harper, in Fun With Dick and Jane). Given the large number of workers who have been doing part-time work in lieu of full-time work thanks to economic conditions, some re-allocation of employment resulting in underemployment is not a far fetched thought, but makes the employment situation and its economic impact more dire than the headline figure suggests.

So the moral of the story is that you absolutely should look at the headline unemployment number, U-3, the total unemployment number U-6, and both the percentage point change as well as the absolute change in unemployment for both U-3 and U-6 in order to get the accurate employment picture. Using the headline number on its own can lead to disaster.

The non-farm employment change revisions for September and October were quite bad
(EDIT: transposed the months in the original post, corrected):

September original: -284,000 jobs
September revision: -119,000 jobs
September revised: -403,000 jobs

October original: -240,000 jobs
October revision: - 80,000 jobs
October revised: -320,000 jobs

Non farm employment change for November (i.e. November) was a total disaster:

Consensus forecast: -335,000 jobs
Actual change: -533,000 jobs

The job loss rate seems to be accelerating...

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