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Wednesday, October 10, 2012 3:55 AM

Mish on Capital Account: IMF Downgrades, Unemployment, Participation Rate, Conspiracies; What is the Best Way to Measure Unemployment?

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Once again, on Tuesday, I had the pleasure of being on Capital Account, live television with Lauren Lyster.

We discussed IMF downgrades, unemployment, conspiracy theories, and economic outliers. We also discussed my proposal in regards to the proper way to measure the unemployment rate.

I come in at about the 3:40 mark, but the first few minutes of Lauren are entertaining as usual.

Link if video does not play: Mish on Capital Account.

A New Way to Measure Unemployment

On Monday, in the wake of a controversial drop in the unemployment rate, Gallup Economist Dennis Jacobe proposed a A New Way to Measure Unemployment.

He proposed "Payroll to Population (P2P) -- the number of Americans employed full-time for an employer as a percentage of the U.S. population."

Jacobe's proposal is horrendously flawed. The reason is demographics. Should a someone 80 years old, retired, and does not want  a job be considered unemployed?

They would be in Jacobe's model. Simply put, P2P has fatal demographic flaws.

Simple Unemployment Rate Construct

I have a better, simpler, approach, that I mentioned on Capital Account: If you do not have a job and want one, you are unemployed.

Note that my definition picks up those in school because they cannot find a job. It also picks up those who are retired (yet still want to work).

I suspect millions have retired, not because they wanted to, but rather because they used up all their unemployment benefits, ran out of money, and retired to have some money coming in from Social Security.  

The BLS "gotcha" question is whether or not a person looked for work in the last four weeks. Yet, few realize "looking" is not enough. One had to have an interview, seek an interview, or apply for a job to be considered "officially" unemployed.

Reading want ads every day and searching for jobs on Monster every day for weeks on end does not constitute "looking" to the BLS.

More Distinctions

Some people in school may want part-time work, but not full-time work.  Others may be working part-time but want a full-time jobs. I would track those categories as follows.

  • U1: Those who want a full time job, are able to work, but are not working.
  • U2: U1 + Those who want a part-time job, are able to work, but are not working.
  • U3: U2 +  Those working part-time who want a full-time job

In my scheme of things, U2 would be the official unemployment rate. Those in school for economic reasons instead of working full-time would fall in the U1 category. My U3 would pick up under-employment.

Mish Model Unemployment Rate

So what would the "Mish Unemployment" number be?

The answer is the current U5 (9.3%) plus those in school for economic reasons, plus those in forced retirement, etc. I do not have a count of that precisely, but judging from those who dropped out of the labor force, I suspect it would be on the order of 10% to 12% but perhaps a bit higher.

Add in those working part-time for economic reasons "My U3 number" and you are perhaps at 17%.

There is no reasonable way to get to the 22% unemployment rate that some propose. The US is neither Greece nor Spain. Moreover, under-employment, while a serious problem, is simply not "unemployed".

For more on the jobs situation, participation rate, and controversy regarding the surprising drop in the unemployment rate, please see ...

Mike "Mish" Shedlock

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