The Use and Abuse of the Unemployment Rate

In hard times it's the bad economic news that grabs the public's attention. At the top of the list in this tense election year is the unemployment rate. As the Associated Press rightly says, "Most Americans focus more on the unemployment rate...but economists generally prefer the jobs figures."

The economists that report on and interpret labor market statistics for us every month are not involuntarily unemployed. They may have never experienced unemployment personally. So maybe it's not a bad thing that most of the public, and most voters, aren't economists. Perspective matters. Also, economists together don't have many votes, and the number of votes they influence is open to question.

Friday's unemployment report was eagerly awaited. Most analysts expected no change in the jobless rate and only a modest rise in jobs. As it happened, the headline unemployment rate ticked up from 8.2 percent in June to 8.3 percent in July, a change too small to be statistically significant. But the July rate was significantly higher than April's 8.1 percent and raised expectations of a higher rate to come.

Nonfarm payroll jobs, by comparison, rose by a statistically significant 163,000 in July, a distinct improvement over changes in the prior four months, but not enough to make a dent in the unemployment rate. (Remember, the number of unemployed is a body count, while an employed worker can hold more than one job.)

Even though the uptick in the July jobless rate was not statistically significant, numerous headlines in the media labeled the one-month change a legitimate rise. After all, questions of significance are technical details that economists fuss about and shouldn't detract from the apparent reality. Isn't a "3" bigger than a "2?" (Maybe it wouldn't hurt if schools of journalism required courses on the interpretation of economic statistics.)

The headlines following the July labor market release generally fell into three categories: those erroneously citing an unqualified rise in the jobless rate; those only half wrong that featured a rise in both unemployment and jobs; and those highlighting just the rise in jobs.

Perhaps more egregious have been pronouncements on unemployment and jobs by politicians. With only three more monthly labor market reports coming before election day, it can only be expected that selectivity, exaggerations, and misinterpretations of the data will get bolder.

Here are two examples that occurred last Friday, the day the latest unemployment report was released.

Candidate Romney called the non-significant uptick in the July unemployment rate "another hammer blow to the struggling middle-class families of America." Ouch. If he had instead focused on the bigger April-to-July increase in the jobless rate, he might have legitimately stretched his use of weaponry to "wrenching."

President Obama's goof was a serious error of omission. Speaking from the White House, he said, "But let's acknowledge we've still got too many folks out there who are looking for work. We've got more work to do on their behalf."

The president talked about helping the folks "looking for work." He omitted those no longer looking for work - the army of jobless who after many months of fruitless job search finally retreated to the sidelines in exasperation and frustration. No longer active jobseekers, but wanting and needing employment, these "hidden" unemployed, whose skills are gradually being eroded, are not counted in the official headline unemployment rate. And apparently not counted by the president.

A cynic might wonder that, since it's the headline unemployment rate that voters look at, maybe it's not altogether surprising that the jobless who have left the labor force have been forgotten by the president, though perhaps inadvertently.

Fortunately voters don't form their opinions about the state of the labor market solely on the basis of statistics. They look around them, weigh in the balance their family's job situation and what's happening to their friends and neighbors - an accuracy and reality not found in the published data.