How Much Does the Unemployment Rate Tell Us About the Economy? Not as Much as We Think.

Taking the Long View of the Global Economy
March 7 2014 2:03 PM

Missing Persons Report

Our obsession with the unemployment rate obscures more telling indicators about the economy.

United States President Jimmy Carter at the Soviet Embassy in Vienna, Austria on June 17, 1979.
How significant is it that no president has won re-election with unemployment greater than 7.2 percent? Not very.

Photo by AFP/Getty Images

The latest edition of the Bureau of Labor Statistics report is out, and it shows that, statistically speaking, the U.S. added 175,000 new jobs in February and its unemployment rate rose slightly to 6.7 percent. The insta-reaction world greeted the report as better news than expected. Much of the discussion, and almost all of the headlines, revolved around the unemployment rate. While it’s hardly surprising that our public discussion gets reduced to one easily digestible statistic that goes up or down at regular intervals, the rate itself is perhaps the least important piece of information, even as it garners the most attention. These jobs reports are replete with valuable data and information, most of which gets lost in the annexes and tables that the BLS assiduously compiles and that few people actually read.

Zachary Karabell Zachary Karabell

Zachary Karabell is an author, money manager, and commentator. His most recent book is The Leading Indicators: A Short History of the Numbers That Rule Our World.

The centrality of the rate to our public debates about employment in the U.S. has been growing for decades, and it reached something of an apex in 2012 when it shape-shifted into a campaign-coverage mantra: “No president has ever been re-elected with an unemployment rate greater than 7.2 percent.” Never mind that we can only track the unemployment rate back to the late 1940s, and that since then there have only been 16 presidential elections, and that only seven presidents have run for re-election—and yes, for the two who lost, the unemployment rate was indeed above 7.2 percent. But saying “No president has ever been re-elected with an unemployment rate greater than 7.2 percent in the seven re-election races we’ve had since the late 1940s” would lack a certain punch. Seven is not exactly a statistically significant number. You could have flipped a coin seven times and gotten two heads and five tails. Not sure what that tells you about probability and causation.

But that is only the tip of the clichéd iceberg. The rate has become a shorthand for jobs and employment. But is it? The employment metrics that determine the size of the labor force depend on a very 20th-century definition of what it means to have a job or to be looking for one, i.e., you have looked for a job in the past four weeks and haven’t found one. That means that anyone who is entrepreneurial doesn’t count. It also means that anyone looking for longer eventually “drops out” of the labor force (statistically speaking, at least) and becomes “marginally attached to the labor force,” “discouraged,” or simply not part of the labor force at all.

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But the vagaries of who counts as unemployed and who doesn’t are relatively well understood. Less recognized is that the survey methods of the household reports still depend largely on calling people on their home phones, even though increasingly large portions of twentysomethings have no landline and are much less responsive to survey calls than prior generations. It’s not as if the BLS is unaware of that challenge, but they’re still far away from gathering crucial jobs data via texting or IM conversations.

Even if these communication problems didn’t exist, there is the larger issue of treating every job as a net economic positive and the absence of one—again, statistically speaking—as an economic negative.

About 600,000 of the 1.6 million jobs that the BLS says were added over the past year are in retail services, bars, and fast-food joints. Many of the rest are in health care services, though not higher-paying jobs for nurses or doctors, but roles such as assistants, orderlies, and elder care professionals. The vast majority of job growth, therefore, is very low-paying, with minimal if any benefits attached. If workers in these roles earn an average of $10 an hour, that places them just at or slightly above the poverty line. This may be job creation, but it is hardly job creation to celebrate as a sign of economic strength.

Yes, entry-level service jobs have always been a significant part of our economy, and of any society’s economy. They are at best a step into the workforce. McDonald’s is currently running ads featuring a teenager in his first job and his proud parents arriving to be his first customer. The not-so-subtle message is that McDonald’s can be the start of a career, which is clearly true. It is equally true that it can be a sign that few other opportunities exist.

On the flip side, the striving of millions to carve out new careers via some combination of self-employment and part-time work is largely invisible in the BLS surveys. According to census figures, more than 500,000 small businesses get started each month (and hundreds of thousands go out of business as well), and there are as many as 22 million people who are self-employed. Only a portion of that gets captured in our employment reports. Many don’t have a payroll system and hence are not part of the payroll surveys, and if they are working part time in a less than ideal job in order to fund their new business, only that element is likely to be captured statistically in these reports.

The economic system continues to move away from manufacturing and large industry and toward some uneasy combination of tens of millions struggling in low-paid jobs—and with inadequate education or skills to move beyond those jobs—and millions more striving and struggling with some success to carve out a sustainable life, plus a small number garnering immense gains. That is an evolving reality ill-suited to a binary employment rate and a monthly report that we seize on despite its reductive simplicity. The challenges we have are complex. The numbers we are relying on are simple. Given a choice between using simple numbers to solve complicated problems and using the wealth of information we have to construct a more prosperous future, which would you choose?

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