By Jared Levy, Editor, Smart Investing Daily, taipanpublishinggroup.com
Headlines declare that the unemployment rate dropped again this past month. There were many experts who thought we would see a rise in unemployment. So perhaps the “seemingly” positive data was a main driver of the recent stock market rally in the face of not-so-strong economic data here in the States, the catastrophe in Japan and revolution in the Middle East.
It is true (I think?) that 216,000 jobs were added last month and that number does seem to be growing each month, but when I hear quotes of 8.8% as our national unemployment rate, I just cringe!
It pains me to see people get misled day in and day out. I know that in my own life I wish everyone I met would tell me the raw truth. But we all know that the truth is often polished, augmented, twisted or thrown away altogether.
Being cordial is one thing, but when masses of people are “taught” to believe a partial truth that has direct ramifications on their monetary and social well-being, a line must be drawn.
A “Peculiar” Figure
The percentage number we are told is the official unemployment rate is called the “U3” measurement, which doesn’t calculate the full unemployment picture. It actually measures the amount of unemployed workers divided by the people in the participating labor force.
The devil is in the details in how they define “unemployed workers” and the participating labor force itself. I’ll show you how this can present a serious statistical conundrum in just a moment.
There are several measurements that the BLS (Bureau of Labor Statistics) offers us, as noted in the chart below. As a total figure, U3 is the most limited in scope and is about half of the U6 measure at present. The U6 at least gives a slightly more accurate reading.
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To be fair, figuring out exactly how many people are truly and fully employed is a daunting task. The BLS releases a massive amount of data on a monthly, quarterly and annual basis. I understand that the immense amount of data can be a challenge to sift through, but it is more about the way the data is presented and interpreted by the media that bothers me.
The data is flawed in my opinion because there are several components and measurements that go into the formula. Furthermore, part of the equation is a bit nebulous.
The “Participation Rate”
This is a highly misleading part of the unemployment equation. The participation rate is the ratio between the amount of people who are currently employed or who are ACTIVELY looking for a job as a percentage of the total people who are able to work (labor force). Talk about a subjective definition!
Right now the participation rate is at a 25-year low of 64.2%. Here is what that means:
- Let’s assume that the eligible working population increases by 1 million per year — and the participation rate stays flat. The economy will need to add about 53,500 jobs per month to keep the unemployment rate stable.
- If the participation rate drops (like it’s been doing) from 64.2% to 60%, it would only take 50,000 new jobs per month to keep the official unemployment rate “stable” in the above scenario.
- A drop in the participation rate can make the employment situation seem better than it is. But there are drawbacks to moves in either direction!
I know this concept is about as clear as mud and that is part of the problem. There are so many ambiguous concepts and measurements, that getting a true reading is next to impossible.
Courtesy of Zero Hedge
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Who’s Not Counted as Participating Workers?
Marginally Attached
In the BLS table above, you will notice the term “marginally attached.” According to the BLS, persons marginally attached to the labor force are those who currently are neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime in the past 12 months. These people are not counted in the U3 reading (official unemployment rate).
Discouraged
Discouraged workers are a subset of the marginally attached. Basically these are people who have given a job-market related reason for not currently looking for work. So if they don’t feel anyone will hire them because of their skill set, education or where they live, they are omitted from the official unemployment rate.
Discouraged also refers to a person employed part time for economic reasons who is available for full-time work but can’t get the hours and are forced onto a part-time schedule or work for less pay. They are not counted in the official unemployment rate.
Non-active
If you are not actively looking for work at all and don’t want a job, you are NOT counted in the participation rate or in the official unemployment rate.
Births and Deaths
Obviously the amount of people entering and leaving the population also affects our national unemployment rate. If fewer people are available to work and the amount of jobs remains the same, the unemployment rate goes down and vice versa.
Which Rate Is Correct?
There are so many complex pieces to this puzzle. Hopefully this opens your mind to the topic. I encourage you to learn about the different factors that go into finding the different unemployment rates. I would also recommend you keep track of the participation rate and population changes so that you can get behind the headlines, which are usually misleading.
It might help you get ahead of some significant market swings.
For example, if unemployment does drop and companies can’t find workers to fill specific positions, they may have to raise salaries. While that may be a good thing, it may add inflationary pressures and cause our friends at the Fed to raise rates… not good for housing or the equity markets.
As for our current situation, I think it’s quite brash of any politician to claim major victory with regard to unemployment in this country. Aside from the understated unemployment rate, I have a feeling Americans are going to witness a major shift in the way we have to earn a living. For many, the change will not be welcome. The days of spending 40 years with a company and retiring with a healthy pension and Social Security are no more.
For now, maybe those claiming how many jobs they are adding should be looking at the data more closely and thinking about how America will reinvent itself and its workforce.
Editor’s Note: Things are about to change drastically in the U.S. and around the world. But it may not be the reason you think. There’s a growing crisis creeping just under the surface of our nation’s financial problems. When this “under-crisis” finally breaks through the surface, expect all hell to break loose. Find out where the real danger lies in this eye-opening financial investment report.
About the Author
Jared Levy is Editor of WaveStrength Options Weekly, our options trading research service and Co-Editor of Smart Investing Daily, a free e-letter dedicated to guiding investors through the world of finance in order to make smart investing decisions. His passion is teaching the public how to successfully trade and invest while keeping risk low.
Jared has spent the past 15 years of his career in the finance and options industry, working as a retail money manager, a floor specialist for Fortune 1000 companies, and most recently a senior derivatives strategist. He was one of the Philadelphia Stock Exchange’s youngest-ever members to become a market maker on three major U.S. exchanges.
He has been featured in several industry publications and won an Emmy for his daily video “Trader Cast.” Jared serves as a CNBC Fast Money contributor and has appeared on Bloomberg, Fox Business, CNN Radio, Wall Street Journal radio and is regularly quoted by Reuters, The Wall Street Journal and Yahoo! Finance, among other publications.
