The Fed is looking at 19 ways to measure the recovery in the employment data. The Fed says it is “data driven.” And the Fed says that its key area of focus is unemployment. 19 ways or is this the 50 ways that Paul Simon would sing about?
NBEIC (National Business Economics Issues Council) member and former Chief Statistician for the United States looked at some history about how the United States measures the unemployment rate. Bob notes that The Bureau of Labor Statistics (BLS) “decided to use the current definition since they started releasing the unemployment rate in the mid-1940” era. Okay, that means we are applying a primary measurement tool that is of World War vintage.
Think about what the economy looked like then versus what it looks like now.
Bob also notes that questions about how to measure changes in labor force conditions has been raised in the past. He noted that “Congress had created at least one commission to study unemployment data -- one was Levitan Comission in the 1970s. They made many recommendations but not to redefine the featured rate. “ So Bob’s conclusion is direct: “statistical agencies make technical definitions.”
So how do we know what a real unemployment rate is? Haven’t we reached a time to reexamine this whole issue and modernize these methods? It certainly seems the answer is yes.
At Cumberland we use Beveridge Curves. We take the job openings data monthly from the national statistics and we create those curves using the major unemployment rates (U-3) and (U-6). We also delve deeply into the disaggregated data series such as male head of household with spouse present series or single mom series. There is a wealth of data. But it still all comes down to the same methods of calculating unemployment and acquiring the information through two major surveys (household and payroll).
We will end this note with some Abbott and Costello humor sent to us by Jim Smith who forwarded it in the NBEIC group. His source is not known to me. Enjoy.
COSTELLO: I want to talk about the unemployment rate in America.
ABBOTT: Good Subject. Terrible Times. It’s 5.6%.
COSTELLO: That many people are out of work?
ABBOTT: No, that’s 23%.
COSTELLO: You just said 5.6%.
ABBOTT: 5.6% Unemployed.
COSTELLO: Right 5.6% out of work.
ABBOTT: No, that’s 23%.
COSTELLO: Okay, so it’s 23% unemployed.
ABBOTT: No, that’s 5.6%.
COSTELLO: WAIT A MINUTE. Is it 5.6% or 23%?
ABBOTT: 5.6% are unemployed. 23% are out of work.
COSTELLO: If you are out of work, you are unemployed.
ABBOTT: No, Congress said you can’t count the “Out of Work” as the unemployed. You have to look for work to be unemployed.
COSTELLO: BUT THEY ARE OUT OF WORK!!!
ABBOTT: No, you miss his point.
COSTELLO: What point?
ABBOTT: Someone who doesn’t look for work can’t be counted with those who look for work. It wouldn’t be fair.
COSTELLO: To whom?
ABBOTT: The unemployed.
COSTELLO: But ALL of them are out of work.
ABBOTT: No, the unemployed are actively looking for work. Those who are out of work gave up looking and if you give up, you are no longer in the ranks of the unemployed.
COSTELLO: So if you’re off the unemployment roles that would count as less unemployment?
ABBOTT: Unemployment would go down. Absolutely!
COSTELLO: The unemployment just goes down because you don’t look for work?
ABBOTT: Absolutely it goes down. That’s how it gets to 5.6%. Otherwise it would be 23%.
COSTELLO: Wait, I got a question for you. That means there are two ways to bring down the unemployment number?
ABBOTT: Two ways is correct.
COSTELLO: Unemployment can go down if someone gets a job?
ABBOTT: Correct.
COSTELLO: And unemployment can also go down if you stop looking for a job?
ABBOTT: Bingo.
COSTELLO: So there are two ways to bring unemployment down, and the easier of the two is to have people stop looking for work.
ABBOTT: Now you’re thinking like an Economist.
COSTELLO: I don’t even know what the hell I just said!
ABBOTT: Now you’re thinking like a Politician.
David R. Kotok, Chairman and Chief Investment Officer