No one get upset over the problematic math behind the unemployment rate.
Even when I took economics in university and we got on this topic, our professor said that it is a very flawed number for such a numerous amount of reasons, but until the government adopts a better way of substantiating, view it as nothing more than a number that may or may not help you gauge the economic climate.
In other words, there is some benefit in understanding our situation with this surveyed number, but you should always question it and the media and government will use it how they please for their own agendas.
The debate on the unemployment rate is very interesting; Google it if you have time and read up.
Judging unemployment via the unemployment rate is a bit like judging your website's popularity via Alexa. The question becomes: is lousy data better or worse than no data?
It's not no data. There are lots of data points to use, it's the choice of exactly which data points to use that is in question. The same debate rages over inflation as well.
The issue is who is and who isn't included in the definition of unemployed. The truth is, if you don't have a job and you need one, but you've given up your search, you're still unemployed.
Further how do we count people who are underemployed? For instance, software developers who take fry-cook jobs because a crappy paycheck beats no paycheck. Self-employed is tricky too, because is slow business unemployed? Sure each of these edge cases is just that, but there are enough to add up to a noticable amount.
It's still a useful number as long as it's measured consistently. It may not be a verbatim reflection of worker to full employment, for example, since it doesn't count "under employed" or the people that want to work more hours, but can't. However, if we know that the 10% it represents is more than triple what we might consider normal then it can be a telling gauge.
It's very true that the time series Unemployment does not count involuntary part time workers. However, the time series Involuntary Part Time Workers does count people who want to work more hours but can't.
The government in Germany some years ago messed around with the data and the data set until all appeared well and some parts of the unemployed population - apparantly mostly the long-time unemployed, who have no motivation left to ever leave the welfare benefits system to work again - were just dropped from the data set. Recognize that unemployment data is a government tool. It's one of many interesting data points for one's analysis of the economic situation, but by itself it's pretty meaningless as it's not consistently measured over time.
Here's an excellent article detailing how the government over the past 40 years or so has been changing the measurements of our basic economic indicators: http://harpers.org/archive/2008/05/0082023
There's still a problem: when the unemployment rate starts to fall six months or a year after it spikes, that in itself tells you nothing about whether people are exiting unemployment because they've found jobs or because they've given up looking.
Interesting. If you look at those numbers, the amount of people who used to work more is also declining, meaning people aren't earning as much as they used to from more than one job.
You are right, it is a flawed number, it does not take into account "the discouraged(people who gave up looking for work)", "the startup(ie most of YC)", prisoners(1.5% of theworking population in US) and some other groups.
However, 10.2% unemployment even by flawed definition is still significant.
An extended period of unemployment will be very bad for a society based on consumption. Consumer spending accounts for two-thirds of the US economy and consumers are a dying species.
I see few signs that we are in recovery. What I see is boredom with gloom. People want the economy to be in recovery, so they find reasons to believe it so.
That's true, we may not be in a recovery but in a restructuring. Restructuring an economy is much more painful then a run of the mill recession.
However if we are indeed restructuring to be less of a consumer nation and more of a manufacturing and export nation again, in the long run that's a good thing.
Or to put it in other words, you can't run both trade and fiscal deficits at the same time for ever. Things would not have gone this far if the US didn't have such a huge fiscal deficit, which allowed China to depress their currency by buying US debt. If it had not been for China buying so much US debt, the dollar would have slowly fallen against the yuan over the years, and the yuan would have slowly risen. And if oil wasn't traded in US dollars, we would have invested more in insulation and alternatives much sooner. Now this is all finally happening and it is painful, but unavoidable.
A very good point that I was going to include in my comment on this article and left out in an effort to stay on my topic about the flaws of the calculation.
To support your point, I think it is more well known after this last year that "recession indicators" are lagging and we are typically in a recession a good 3-6 months before it is declared and the reverse is true for when we get out of it.
Yes. The recession began in late 2007. Unemployment didn't start spiking until mid-2008.
What happens is that companies are not anxious to start laying off employees when the economy goes south, for a variety of reasons. So they start spreading less work among their existing workforce. Worker productivity and hours worked both go down.
This makes these leading indicators. On the other end, when the economy starts winding up at the end of a recession, the now-lean companies aren't anxious to start hiring again. So instead they start giving their existing workforce more work, asking people to work more hours, etc. So you have the opposite: unemployment stays high for a while while productivity and hours spike.
What that means, I'm not qualified to say. And it looks like real economists are (as always) of differing opinions on it. Ideally you'd want to see both of those indicators on the up-tick, but given that one is increasing and the other is not getting worse, it's probably a sign that unemployment is going to start going down here pretty soon.
In fact, GDP continued to grow in Q2 of 2008 (albeit slower) and in Apr. of '08 the Unemployment rate was at 5% (up a mere .1% from Dec. '07).
I was always taught that a recession is 2 quarters of negative GDP growth. Lately that definition has changed to "when economists say the recession began based on rules they made up". The problem with that measuring stick is you are defining behavior based on rules that are supposed to measure behavior. If you've decided the unemployment rate is a lagging factor than you define the Recession as having started earlier so that it fits the rule.
The reality is GDP didn't start to fall until Q3 of '08 and Unemployment had been going up steadily since Apr. of '08 (a full 3 months before the start of Q3). In my book that isn't a lagging sign.
"Two consecutive quarters of negative GDP growth" is just a "rule ... economists made up" too. And a totally arbitrary (albeit seductively simple) one at that. The NBER look at when the economy actually starts slowing down, not when some arbitrary amount of time has passed after the sign on national GDP growth flipped over. It is more complicated, yes, but also more sophisticated and rigorous than the old rule of thumb.
When it comes to indicators, the fact is that the definition of 'recession' is pretty irrelevant. Your rule of thumb is backward-looking and thus pretty much useless for figuring out how the economy is going to move anyway. You can't know the economy is in trouble until it's already been there for two quarters, eh?
Likewise with unemployment, if you ignore the other indicators you won't know something is going wrong until you're already deep into it (and it starts getting reflected in unemployment data). Whereas if you pay attention to leading indicators like productivity, you'll be able to better predict what unemployment is going to do.
6 months sounds great. Since the recession is probably over (most recent GDP change was positive, although the NBER hasn't ruled yet), we should have recruiters kicking our doors down by April or May. And then we'll hire carpenters to replace the doors, and everyone wins.
Unfortunately, I think it's fairer to say that the first derivative of the unemployment rate is what actually lags by 6 months. April or May might be when it starts falling (fingers crossed), but it will have to fall for a couple of years before it reaches its pre-recession level. Every economist or seer I've heard of says it will still be around 9% in late 2010.
And that's six months if we're lucky. Consider the last one: recession ends in November 2001; unemployment doesn't really start dropping until early 2004!
The beginning of this is generally considered to be the Collapse of Lehman brothers and the dissolutions of Bear Stearns and Merril Lynch which all happened in Sept. 2008. The Unemployment rate in Aug. '08 was 6.2% but that was already up from 4.7% in Aug. '07.
So actually it was a predicting factor on the way down.
The collapse of Lehman brothers and Stearns was itself a lagging indicator. The issues had already been pressing all the way back to 2007 (see 'housing bubble'). We had clear signs of a stalling economy well before these companies collapsed. The signal these collapses sent, really, was that this was going to be a deeper recession than we had originally hoped.
I don't claim to understand all of this, but my wife (PhD economics) first started sending me warnings about serious economic issues in late 2007.
Remember in 2008 when we got tax rebates from Bush? Those were to get the economy going, based on the fact that we were entering a recession. It was a big worry. Unemployment at that point was < 5% too. In fact, I bought my house that summer, when housing prices were on the way down, but before the credit crunch made it impossible to get credit. We were already in a recession then, according to the news at the time anyway.
The collapse of LB and BS et al, is something different, those were a big deal panic, associated with, but not the start of, the recession. They were the worsening of it.
The actually interesting thing here is that we were told about the recession we were in for quite a while before the collapses, then we were told how we just got into a recession because of the collapses. Or have we always been at war with eastasia?
Two things about these figures. The first is that you shouldn't believe any historical comparisons. Over the years the US definition of unemployment was revised multiple times, and each time it was revised it was to a methodology that gave lower numbers. Therefore you aren't comparing apples to apples when you compare current figures with, say, the recession in the early 80s.
The other thing to consider is that we aren't out of the woods yet economically. There are still a lot of credit issues out there. You can see http://bentilly.blogspot.com/2009/11/is-financial-crisis-rea... for a list of some of them. And continued jobless numbers are not about to help.
Great link. Thanks. Funny thing is, when just about everyone I knew was "getting their war on" and "getting their granite countertops on", it all felt ominous to me. I'm afraid that the U.S. is in for a very humbling penance.
Even when I took economics in university and we got on this topic, our professor said that it is a very flawed number for such a numerous amount of reasons, but until the government adopts a better way of substantiating, view it as nothing more than a number that may or may not help you gauge the economic climate.
In other words, there is some benefit in understanding our situation with this surveyed number, but you should always question it and the media and government will use it how they please for their own agendas.
The debate on the unemployment rate is very interesting; Google it if you have time and read up.