America's Real Unemployment Rate

Updated February 2014

The most commonly reported unemployment rate is U-3, defined as the total percentage of the civilian labor force that is unemployed.  This rate does not include unemployed workers who have been discouraged and given up on the idea that they will be able to get a job.

Now that we have the headline definition of unemployment in mind, I want to look at three of the factors that are coming into play that may be distorting the BLS unemployment numbers; the growing size of the labor force, the civilian employment-to-population ratio and the civilian labor force participation rate.  Let's start this posting by looking at the size of the civilian labor force (i.e. those Americans that want to work, are looking for a job or are currently working) as shown on this graph from FRED:

At the end of November 2013, there were 155.294 million Americans in the labor force.  

Let's take a closer look at what has happened to the labor force since its nadir just after the end of the Great Recession:

At its low point in December 2009, there were only 153.120 million Americans in the labor force.  Over the 48 months between December 2009 and November 2013, the labor force grew by 2.174 million potential workers or 45,290 potential workers every month.  This means that in order for the U-3 unemployment rate to remain steady, at least 45,290 jobs have to be created every month over the 48 month period to account for the growth in the labor force.  It is just common sense that, along with growth in the size of the population, there will be growth in the number of people wanting to work.

Now, let's look at the civilian employment-to-population ratio from FRED since the end of the Great Recession:

At the end of the latest recession, the civilian employment-to-population ratio was 59.4 percent.  This rate fell fairly sharply in the last half of 2009 and has been in a range of between 58.2 and 58.7 percent ever since, a ratio that is among the lowest experienced since the early 1980s.   The past four and a half years has also been the longest period of time that the ratio has seen virtually no growth all the way back to 1948 as shown here:

Now, let's look at the civilian labor force participation rate since the end of the Great Recession:

The participation rate has fallen from 65.7 percent in June 2009 to its current level of 63 percent, the lowest level seen since the mid-1970s and is well below its 30 year average of 65.7 percent.  While some are blaming this on retiring baby boomers, in fact, as we see on this graph, the labor force participation rate for older middle-aged Americans (in brown) is rising and is now at or near 65 year highs:

As you can clearly see, the labor force participation rate is dropping for younger Americans between the ages of 20 and 24, not for older Americans as is generally considered the cause of the dropping participation rate.  This is certainly not a trend that will continue over the long-term.  As well, perhaps the fact that baby boomers are seeing the returns on their investments shrivel under the watchful eye of Mr. Bernanke and his merry band of central bankers may have something to do with the rising number of older middle-aged Americans who need to work to keep cat food on the table.

Now, let's get to the meat of the matter.  According to Zerohedge, the labor force participation rate is severely understated for the aforementioned reasons and that the real unemployment rate should be calculated using changes (i.e. growth) in the size of the overall working age, non-institutionalized population rather than the shrinking size of the labor force since, as I noted in the first part of this posting, the civilian labor force continues to grow.   If, as Zerohedge suggests, we use a long-term labor force participation rate of 65.8 percent, we can derive the implied unemployment rate.  Basically, by applying a more reasonable and realistic labor force participation rate that is nearly 3 percentage points higher than the reported rate, there are an additional 5 million potential labourers that should be added to the workforce.  What this does is push the unemployment rate up because when they are included, there are now nearly 16 million unemployed Americans (the U-3 10.9 million plus the additional 5 million noted above).  These unaccounted for Americans that would ultimately like to be in the labor force but fall off the Bureau of Labor Statistics stringent definition of a "laborer", would push the implied unemployment rate up by roughly 4.5 percentage points over the BLS number, brining the real unemployment rate at around 11.5 percent rather than the much ballyhooed headline 7 percent number. 

While the mainstream media follows the Fed's lead, going on endlessly about the improving jobs picture in the American economy, it certainly appears that there are a number of factors at play that may be temporarily distorting employment data in the United States and that reality is far worse than what we are being led to believe.