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7.7% unemployment inaccurately depicts true jobless rate

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This article was originally published by the Madison Independent Examiner. A slideshow with graphs and statistics is available for viewing there.

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According to a report released yesterday by the Bureau of Labor Statistics (BLS), there were approximately 146,000 jobs added in the U.S. in November and the unemployment rate dropped to 7.7 percent, which would be the lowest since 2008. The report is based on a survey of households and employers, and does not accurately depict the reality of the jobless rate in the U.S. today.

The 7.7 percent rate is the government's most widely publicized unemployment rate, known as the U-3, which takes into account only those who are collecting unemployment benefits and actively looking for work. It does not take into account those whose unemployment benefits have run out, those who have given up seeking work, those who are underemployed -- desiring full time work but forced to work part time, or those who have dropped out of the labor force more than 12 months ago.

There is also a factor in the calculations known as "seasonal adjustments." The BLS uses a software program known as X-12 ARIMA, a complex modeling algorithm, to factor in seasonal adjustments to the jobs reports. As with any software program, the results are only as good as what the data input is and the results are easily manipulated. Job growth reports from the BLS have a 100,000 jobs margin of error on a monthly basis, but outside of that margin they are 90 percent accurate.

In fact, the numbers in the reports are regularly (and quietly) revised each month. Last month's jobs report suggested that the economy had added 148,000 jobs in September and 171,000 jobs in October. That has now been revised downward to 132,000 and 138,000, respectively.

According to the BLS report, 53,000 of the 146,000 jobs added in November were in the retail sector. That would obviously factor in as a seasonal adjustment, because most of those jobs will disappear after the holiday season. Combining that with the potential for a 100,000 job margin of error could mean job losses and a rise in the real unemployment rate last month. It is also difficult to factor in anomalies like the amount of people temporarily out of work due to Hurricane Sandy during the survey week, although the BLS reported that the effects of that were minimal.

Brad Plumer, writing for the Washington Post, explains the potential for discrepancy:

The discrepancy"has to do with what's known as "seasonal adjustments." The U.S. economy follows certain predictable patterns in hiring and layoffs every year. School districts always let workers go for the summer and hire in the fall. Retailers always staff up for the Christmas holidays and lay people off afterwards. Students always flood the labor market in June. And this is exactly what BLS does in its monthly jobs reports.

The BLS report releases the highly publicized U-3 unemployment rate along with a lesser known rate called the U-6. There are, in fact, six different scales of unemployment known as "alternative measures of labor underutilization," that are numbered U-1 through U-6. The U-6 rate is the most inclusive gauge of the statistical unemployment rate in the U.S. because it takes into account "total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force."

Another BLS report shows, for example, that the official U-6 unemployment rate for the state of Wisconsin is 13 percent. Nevada's U-6 rate is 21.4 percent, up from just 7.6 percent in 2007. Washington State is at 17.1 percent. Economically troubled California has a 19.6 percent real rate, while Rhode Island is at 18.3 percent, more than double its 8.3 percent rate in 2007. Only four states, Nebraska, North Dakota, South Dakota and Oklahoma have a U-6 rate that is under 10 percent.

Indeed, many have already pointed out that the lower unemployment rate has more to do with people dropping off the unemployment rolls and out of the labor force than with job creation, as evidenced by a reduction in the numbers reported in the labor force. See here and here.

Even the U-6 rate, however, does not accurately measure the true amount of eligible workers who are out of work.

The key words in that report are "marginally attached." Persons marginally attached to the labor force are described as those who currently are neither working nor looking for work but indicate that they want to work, are available for a job and have looked for work sometime in the past 12 months. Discouraged workers, a subset of the marginally attached, have given a job-market related reason for not currently looking for work.

Many Americans have given up on the job market and have not looked for work in the past 12 months. Many do not have a phone or mailing address through which to respond to a household survey. There is no way to count all of the unemployed in America who are no longer "marginally attached" to the labor force and according to some estimates that number is staggering.

These people have been called by CNN "The 86 million invisible unemployed" and that, taken together with some simple math, shows that the true jobless rate in the U.S. is far higher than 7.7 percent.

The total U.S. population is approximately 330 million. 24 percent of those, however, are young people not eligible to work and 13 percent are retired. So the total pool of available workers in the United States is 100% - (24% + 13%) = 63% of 330 million people, or about 208 million workers. The U.S. government officially admits that 7.7 percent of the labor force is "visibly" unemployed, which accounts for about 16 million people. Together with the "invisible" that means about 102 million Americans are available to work but do not have a full time job. And with 102 million out of 208 million available workers not working, the true jobless rate in the US right now is closer to 49 percent, not the 7.7 percent the U.S. government and corporate media is propagandizing about.

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Gregory Patin is a free-lance writer residing in Madison, WI. He earned a BA in political science from the University of Wisconsin - Madison and a MS in IT management from Colorado Tech. He is politically independent and not affiliated with either (more...)
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