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Interpreting Unemployment Rate

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June 12, 2008 – Comments (2)

Ok, I call time out. From what I gathered last week, 2 things happened. Oil went back up to all-time highs and unemployment numbers were really high. Here's the caveat: in many ways, unemployment numbers are fud. First of all, unemployment is measured in 6 month time windows of people who are looking for jobs.

So if someone is looking for a job for 7 months, and then get it after 7 months, they are no longer part of the 'unemployment rate'. And the unemployment rate won't decrease if they do find a job.

Also, and more importantly, summer months are the slowest for hiring people. That is a fact, and something that I observed first-hand when I interned at a recruiting firm in 2004. Summer hirings crawl to a hault categorically, even in a "healthy" economy.

Now, combine this understanding of unemployment with the fact that financial woes (like increased gas prices & inflation) may cause people that have not worked for years, like houswives, to start looking for a new job, and thus fit the 'unemployed' category.

So it's not necesserily that someone was fired and is looking for a job, but simply that people are looking for jobs who may not have worked in years.

Certainly inflation/high gas prices/mortgage problems would cause more people to enter the market who did not have a need to work in the past.

Pair this up with a seasonality of slow hiring, which may be compounded by slower economic growth, and you get a very bad looking number. However, it may not be as bad as it looks on paper. And such a high number doesn't necessarily indicate that there's less job creation. Technically, you can have more people enter the job market & have higher unemployment rate at the same time. 

 

2 Comments – Post Your Own

#1) On June 12, 2008 at 11:44 AM, leohaas (31.21) wrote:

Not so sure if you are correct about all of this. See this link for who is counted, and who is not counted. I don't read anything in there about people who have been looking for 7 months and are not counted (although until earlier today, I though that was indeed the case).

Most who
 - do not have a job
 - have been actively looking during the prior 4 weeks
 - and are currently available
are counted as unemployed. The only ones not included are prisoners an people in mental institutions.

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#2) On June 12, 2008 at 2:18 PM, SBeren (24.27) wrote:

Leohaas,

Thanks for the link. If you take a look at the definitions provided on that site & pasted below, you will see that it reaffirms my point.

As for my 6 month number, that's a rough estimate, but not far off: "There are about 60,000 households in the sample for this survey. Every month, one-fourth of the households in the sample are changed, so that no household is interviewed more than 4 consecutive months. This practice avoids placing too heavy a burden on the households selected for the sample. After a household is interviewed for 4 consecutive months, it leaves the sample for 8 months and then is again interviewed for the same 4 calendar months a year later, before leaving the sample for good. This procedure results in approximately 75 percent of the sample remaining the same from month to month and 50 percent from year to year."

 As for people who are counted as unemployed, you're incorrect. If you are not looking for a job you are not counted as part of the labor force at all, and thus you are not part of the employed or unemployed number:

"Passive methods of jobsearch do not result in jobseekers actually contacting potential employers, and therefore are not acceptable for classifying persons as unemployed. These would include such things as attending a job training program or course or merely reading the want ads. "

Others agree, "a number of analysts believe this measure to be too restricted, that it does not adequately capture the breadth of labor market problems. For this reason, economists at BLS developed a set of alternative measures of labor underutilisation. These measures are published every month in the Employment Situation news release."

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