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Monday, February 20, 2012 1:18 PM

Disability Fraud Holds Down Unemployment Rate; Jobless Disability Claims Hit Record $200B in January

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Looking for another reason for an artificially low unemployment rate?

Consider disability fraud, people claiming disabilities they do not have such as mental illness. Prior to the great recession 33% of applicants claimed mental illness. The number is 43% now.

There was fraud before, of course. There is even more fraud now.

Please consider Jobless disability claims soar to record $200B as of January

Standing too many months on the unemployment line is driving Americans crazy — literally — and it’s costing taxpayers hundreds of billions of dollars.

With their unemployment-insurance checks running out, some of the country’s long-term jobless are scrambling to fill the gap by filing claims for mental illness and other disabilities with Social Security — a surge that hobbles taxpayers and making the employment rate look healthier than it should as these people drop out of the job statistics.

As of January, the federal government was mailing out disability checks to more than 10.5 million individuals, including 2 million to spouses and children of disabled workers, at a cost of record $200 billion a year, recent research from JPMorgan Chase shows.

The sputtering economy has fueled those ranks. Around 5.3 percent of the population between the ages of 25 and 64 is currently collecting federal disability payments, a jump from 4.5 percent since the economy slid into a recession.

Mental-illness claims, in particular, are surging.

During the recent economic boom, only 33 percent of applicants were claiming mental illness, but that figure has jumped to 43 percent, says Rutledge, citing preliminary results from his latest research.

His research also shows a growing number of men, particularly older, former white-collar workers, instead of the typical blue-collar ones, are applying.

The big concern about the swelling ranks is that once people get on disability, they’re unlikely to give it up and go back to work.
What's the Number?

The above article says there were 10.5 million individuals receiving disability checks. A quick check of Fed data shows there are 27.5 million Civilian Noninstitutional Population - With a Disability, 16 years and over

Unfortunately the data only goes back to mid-2008. I would like to see the pattern before the recession began.

We can see a brief recovery for a year following the end of the recession. However, since mid-2010 the number of people with disabilities has risen by 1.5 million.

All of them dropped out of the labor force and are no longer counted as unemployed.

Household Survey Data

click on chart for sharper image

In the last year, the civilian population rose by 3,565,000. Yet the labor force only rose by 1,145,000. Those not in the labor force rose by 2,420,000.

That is an amazing "achievement" to say the least.

Disability Math

If one million of those disability claims are fraudulent, the civilian labor force would rise to 155,395,000 and the number of unemployed would rise to 13,758,000. The resultant unemployment rate would be reported as 8.9%, not 8.3%.

However, we need to go back further  because there were certainly fraudulent claims prior to the recession. For the sake of argument, let's assume 25% of the total is fraudulent.

Unemployment Rate with 25% Fraud

25% of 27.5 million is 6,875,000.
The civilian labor force would rise to 161,270,000 from 154,395,000
The number of unemployed would rise to 19,633,000 from 12,758,000
The resultant unemployment rate would be 19633/161270 = 12.2%

Don't like that number? Let's assume a minimum of 10% fraud.

Unemployment Rate with 10% Fraud

10% of 27.5 million is 2,750,000.
The civilian labor force would rise to 157,145,000 from 154,395,000
The number of unemployed would rise to 15,508,000 from 12,758,000
The resultant unemployment rate would be 15508/157145 = 9.9%

Is there anyone who thinks disability fraud is less than 10%? If not, then the unemployment rate would be at least 9.9% assuming those in fraudulent claims started looking for work.

For more on the incredulous, artificially low unemployment rate posted by the BLS, please see ...

Mike "Mish" Shedlock
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