Sunday, January 15, 2012

Manipulation 101: The Real Unemployment Rate

* Fake it until you make it. *

* By: Larry Walker, Jr. *

The following passage is from my last post, “Labor Force Contraction with Obama - And other hidden truths” :

“Most of the electorate understands that as the size of the labor force shrinks the unemployment rate declines. But is anyone really paying attention? Since this massive decline in the civilian labor force is a verifiable fact, it's not surprising that the Obama Administration and much of the propagandist media have chosen to ignore it.”

Okay, I confess that I was begging the question. I am fully aware that most of the population doesn’t have a clue as to how the unemployment rate is calculated, and that a healthy subset could probably care less. So in this post I will explain in more detail how, as the size of the labor force contracts, the official unemployment rate declines.

First, here are a few key definitions, which are shown in more detail at the bottom of this post.

  1. The term “non-institutional civilian population” includes persons 16 years of age and older residing in the 50 States and the District of Columbia who are not inmates of institutions (for example, penal and mental facilities, homes for the aged), and who are not on active duty in the Armed Forces.

  2. The term “labor force” includes all persons, in the non-institutional civilian population, classified as employed or unemployed.

  3. And the term “not in labor force” includes persons aged 16 years and older, in the civilian non-institutional population, who are neither employed nor unemployed.

The table above shows the number of Americans counted as part of the labor force, from 2001 through 2011. It does not include those considered, “not in labor force”. You can see that during Bush’s first three years in office, although the economy was in recession, the labor force grew by 2,929,000 (on a seasonally adjusted basis). In contrast, the labor force has contracted by 739,000 during Obama’s first three years.

The dilemma posed by a declining labor force is that the non-institutional civilian population has continued to grow by approximately 1.1% each year. So in reality, the labor force didn't only decline by 739,000 workers over the last three years (on a seasonally adjusted basis), but rather a total of 6.5 million workers dropped out (on a non-adjusted basis). What this means is that a smaller proportion of the populace is working to support a much larger cluster of retirees, unemployed, and those who have dropped out of the labor force.

As you can see, the labor force grew from 143,800,000 at the end of January 2001, to 154,626,000 by December of 2008, for an increase of 10,826,000 workers over the eight-year period immediately preceding Obama. The labor force was expanding by an annual average of 1,353,250 new entrants prior to 2009. But since January of 2009, the labor force has declined by an average of -246,333 workers per year. However, in the macro sense, the real employment situation is dramatically worse.

When the declining labor force is compared with growth of the civilian non-institutional population, as shown in the table below, it is clear that a total of 6.5 million Americans have dropped out of the labor force during Obama’s three years in office. This is the sum of the amounts highlighted in yellow (below). It is the difference between annual changes in the civilian non-institutional population, minus annual changes in the labor force. It represents the annual increase in the working age population, who are not being counted as part of the labor force.

For example, in 2009, the civilian non-institutional population grew by 2,013,000, yet the labor force declined by 145,000, resulting in 2,158,000 persons who should have, but did not enter the labor force. In effect, they dropped out. In 2010, the civilian non-institutional population grew by 2,029,000, yet the labor force declined by 253,000, resulting in 2,282,000 more persons who should have, but did not enter the labor force. Then in 2011, the civilian non-institutional population grew by 1,788,000, yet the labor force declined by another 272,000, resulting in 2,060,000 more persons who should have, but did not enter the labor force.

In effect, there have been no new entrants to the labor force in the past three years, as 670,000 existing workers dropped out (on an unadjusted basis), and all 5,830,000 potential new entrants fell by the wayside. Overall, 6.5 million working age persons have dropped out of the labor force under Obama. Is this change you can believe in?

The massive decline of new entrants to the labor force, which is shown in the table above, and graphically in the chart at the top, directly impacts the unemployment rate, making the employment situation appear better than it actually is. How so?

First, we must understand how the unemployment rate is calculated. The unemployment rate is calculated by dividing the number of unemployed persons by the size of the labor force:

[ (A) Total Unemployed / (B) Labor Force = (C) Unemployment Rate ]

Thus, the official unemployment rate of 8.5%, as reported by the Bureau of Labor Statistics in the January 6, 2012, Employment Situation Report, is calculated as follows:

[ 13,097,000 / 153,887,000 = 8.5% ]

What this means is that, at the end of the year 2011, 13,097,000 persons were officially unemployed, out of a labor force totaling 153,887,000. And so 13,097,000 divided by 153,887,000 equals the unemployment rate of 8.5%. So how could this result have been manipulated? Why, that’s easy.

Manipulation 101

"There are three kinds of lies: lies, damned lies and statistics." ~ Mark Twain

First of all, it is a fact that not everyone who is actually unemployed is officially counted as such. In fact, according to the Bureau of Labor Statistics, millions of Americans of working age, who are not working, are excluded from the official calculation.

Mathematically, what this means is that they have been removed from both the numerator and denominator of the equation (i.e. from both the number of unemployed and size of the labor force). Those eliminated from the official unemployment equation are classified as, “Not in the Labor Force.

A subset of those not included in the labor force is referred to as “marginally attached”. The marginally attached are persons not in the labor force who want and are available for work, and who have looked for a job sometime in the prior 12 months (or since the end of their last job if they held one within the past 12 months), but were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey. Discouraged workers are a subset of the marginally attached.

When it comes to manipulating the unemployment rate, the main question is: What happens when an equal number of persons are subtracted from both the number of unemployed and the labor force? To answer this, let’s look at an example in the table below.

Starting in the middle of the chart, let’s assume that there are 14,000,000 unemployed persons out of a labor force totaling 140,000,000. That would make the unemployment rate 10.0%. Are you with me so far?

Now, let’s remove 3,000,000, from the labor force, and see what happens. Moving one column to the left, you will note that the unemployment rate falls to 8.0%, or by 2.0 percentage points, as 3,000,000 people are removed. That’s a decline of 20%. Wow! That was easy.

If we were to remove 10,000,000 from the labor force, we would get an even more dramatic result. Moving two columns left of center; you will notice that the unemployment rate falls even farther, to 3.1%, or by 6.9 percentage points, as 10,000,000 people are removed. That’s a decline of 69.0%.

Just to add some perspective, it works both ways. Moving one column to the right, you can see that the addition of 3,000,000 to the labor force causes the unemployment rate to rise to 11.9%, or by 1.9 percentage points (an increase of 19.0%). And finally, the addition of 10,000,000 to the labor force causes the unemployment rate to rise by 6.0 percentage points, or to 16.0% (an increase of 60.0%).

So it may be stated that, the act of removing workers from the labor force causes the unemployment rate to decline. It is also evident that an expanding labor force, in which new workers are unable to find work, should cause the unemployment rate to rise. Another fact is that classifying more workers as "not in the labor force" causes a greater percentage decline in the unemployment rate, than the percentage increase realized by allowing a natural expansion of the labor force. Got it?

Therefore, when the unemployment rate is higher than desired, all one has to do is remove a few million workers from the labor force, and voilà, “We are moving in the right direction.”

Now I’m not necessarily saying that the Obama Administration purposefully manipulated the unemployment rate, but since the Bureau of Labor Statistics is a governmental agency, run by a presidential appointee, it's highly probable. I’m just saying that I no longer have faith in the Bureau of Labor Statistics' ability to remain impartial. Perhaps going forward the functions of this agency, as well as others, should be factored out to private non-partisan concerns.

What’s the real unemployment rate?

The Bureau of Labor Statistics (BLS) itself admits that among those it has subtracted from a labor force, several million actually want to work. So I ask you this, If an individual is not working, but desires to have a job, is he (or she) not essentially unemployed? I say, “Yes”, but the BLS says, “No”. So is this a material issue, or is it diminimus? In other words, how many people are we really talking about?

Well, let’s turn to Bureau of Labor Statistics – Table A-38, Persons not in the labor force by desire and availability for work, age, and sex (below). To be precise, as far as BLS methodology goes, as of December 31, 2011, a staggering 87,212,000 working age Americans were not counted as part of the labor force. Among these, it is reported that 81,077,000 do not want a job, and that another 6,135,000 actually want to work.

To reiterate, in my book, if someone wants a job and doesn’t have one, that person is unemployed and should be counted as such. What’s the point of calculating an unemployment rate, which doesn’t include all persons who are unemployed?

Regarding those included or excluded from the labor force, here are a couple of important items to note:

  1. First of all, the BLS only surveys around 60,000 households per month in order to come up with these figures. So as far as we know, the number of unemployed persons who want to work, but are not counted as part of the labor force, could be much greater than what’s being reported.

  2. Secondly, according to Footnote No. 1, in Table A-38 (above), not everyone reported as wanting or not wanting to work is asked. Wait, so not everyone is asked? You know the old saying, “Never assume.”

So, in light of the fine print, the entire sampling outcome is at best grossly inaccurate, and at worst subject to outright manipulation.

From Table A-38, we can see that 6,135,000 workers, not counted as part of the labor force, actually want to work. So what would happen if we added them back into the labor force? Well, let’s run it and see.

In the table below, when the 6,135,000 workers are added back to the labor force, and rightfully counted as unemployed, the unemployment rate jumps from 8.5% to 12.0% (an increase of 41.2%). Is a deviation of 41.2% of material importance? I would think so.

I would contend, that based on BLS data, the true unemployment rate is closer to 12.0%. But at the same time, since only a small sample is surveyed, who’s to say that a large portion of the other 81,077,000 working age individuals, not counted as part of the labor force, don’t want jobs? Did anyone bother to ask them? No. So the actual unemployment rate could easily be much greater than 12.0%. Are you still with me?

In the table below, I have calculated the maximum unemployment rate. That is to say, what it would be if all 87,212,000 working age individuals, not presently included as part of the labor force, were included. When we count them all, the maximum unemployment rate jumps to 41.6%.

You laugh? Well, I’m not laughing. So, based on information published by the federal government, the actual unemployment rate is somewhere between 12.0% and 41.6%. That leaves a lot of room for play, as the lowest the rate can possibly go is 0.0%, and the highest 41.6%. [By the way, the maximum rate doesn’t include those considered to be employed who, for all practical purposes, really aren’t (see the definition of "Employed", below).]

Disregarding the Bureau of Labor Statistics sampling assumptions, the methodology of which you may find at http://www.bls.gov/, for all we know, a larger segment of the population is becoming homeless, generationally dependent, or permanently unemployable. I believe that there are several million more unemployed Americans, who want to work, than we are being told.

In my entire life-time, neither the Bureau of Labor Statistics nor the Census Bureau has ever called upon me to participate in one of these monthly, 60,000 household employment surveys. So who are they calling? How can they call someone who doesn’t have a phone? Where do these numbers really come from? From what I can tell, that’s classified information. Have they ever called you?

So while Obama tells us on the one hand, “We’re making progress,” in reality, all that’s happened is that a larger segment of society has given up any hope of ever having a job. Based upon the job killing policies of his Administration, I would say this is more likely to be the case today, than at any time in U.S. history. So this is progress? And now Obama wants another term to, “finish the job.” I think we’re already finished; the baby boom implosion will take care of the rest.

The Bottom Line: The official unemployment rate is misleading, and can be easily manipulated. By simply removing two or three million persons from the labor force (a little here, a little there), one can easily trim a couple of percentage points off of the official unemployment rate, and then declare that the economy is improving.

Since the beginning of 2009, the net result of Obama’s anti-success rhetoric, coupled with the most reckless deficit-spending record in U.S. history, has been an increase of 6.5 million workers who are no longer counted as part of the labor force. And on top of this, the economy has lost 1.7 million jobs, since February of 2009. The real unemployment rate isn’t 8.5%, it’s somewhere between 12.0% and 41.6%, perhaps even higher, depending upon one’s perspective.

In light of this reality, I find Obama’s statement, “We are moving in the right direction,” to be most absurd. Come on man! But on the brighter side, there is a tremendous opportunity for a new Administration to step in, in 2013, and show the Socialists, Progressives, and Communists who have taken over the Democratic Party, and the delusional fakers and wannabe’s in the White House, who are on their way out of power, what the “right” direction genuinely looks like. Godspeed!

Definitions:

  • Labor force (Current Population Survey) - The labor force includes all persons classified as employed or unemployed in accordance with the definitions contained in this glossary.

  • Civilian non-institutional population (Current Population Survey) - Included are persons 16 years of age and older residing in the 50 States and the District of Columbia who are not inmates of institutions (for example, penal and mental facilities, homes for the aged), and who are not on active duty in the Armed Forces.

  • Employed persons (Current Population Survey) - Persons 16 years and over in the civilian non-institutional population who, during the reference week, (a) did any work at all (at least 1 hour) as paid employees; worked in their own business, profession, or on their own farm, or worked 15 hours or more as unpaid workers in an enterprise operated by a member of the family; and (b) all those who were not working but who had jobs or businesses from which they were temporarily absent because of vacation, illness, bad weather, childcare problems, maternity or paternity leave, labor-management dispute, job training, or other family or personal reasons, whether or not they were paid for the time off or were seeking other jobs. Each employed person is counted only once, even if he or she holds more than one job. Excluded are persons whose only activity consisted of work around their own house (painting, repairing, or own home housework) or volunteer work for religious, charitable, and other organizations.

  • Unemployed persons (Current Population Survey) - Persons aged 16 years and older who had no employment during the reference week, were available for work, except for temporary illness, and had made specific efforts to find employment sometime during the 4-week period ending with the reference week. Persons who were waiting to be recalled to a job from which they had been laid off need not have been looking for work to be classified as unemployed.

  • Not in the labor force (Current Population Survey) - Includes persons aged 16 years and older in the civilian non-institutional population who are neither employed nor unemployed in accordance with the definitions contained in this glossary. Information is collected on their desire for and availability for work, job search activity in the prior year, and reasons for not currently searching. (See Marginally Attached Workers.)

  • Marginally Attached Workers (Current Population Survey) - Persons not in the labor force who want and are available for work, and who have looked for a job sometime in the prior 12 months (or since the end of their last job if they held one within the past 12 months), but were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey. Discouraged workers are a subset of the marginally attached. (See Discouraged Workers.)

  • Discouraged Workers (Current Population Survey) - Persons not in the labor force who want and are available for a job and who have looked for work sometime in the past 12 months (or since the end of their last job if they held one within the past 12 months), but who are not currently looking because they believe there are no jobs available or there are none for which they would qualify.

Link to Chart Data: Google Docs

Related:

- Manipulation 201: Playing With Unemployment

- Labor Force Contraction with Obama

Reference: Bureau of Labor Statistics - Historical Data

4 comments:
  1. Out of curiosity, have you taken either your new min or max calculations and looked at trending?
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    The BLS didn't start tracking those not in the labor, by who did or did not want to work, until 1994. However, I just created an (unadjusted) table comparing the Annual Change in the Labor Force. It's interesting to note that aside from the past three years (2009, 2010, and 2011), the last time there was a net decline in the Labor Force was in 1951. However, the decline in 1951 was due to a general decline in the non-Institutional Civilian Population. So that makes Obama's misrepresentation unprecedented. It's outright manipulation.

    Here's a link to my spreadsheet, with data pulled directly from the BLS: Civilian Population vs. Labor Force - 1947 to 2011.

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  2. And because she insisted, here's a link to my spreadsheet comparing the same from 1929 to present: Civilian Non-Institutional Population vs. Labor Force - 1929 to 2011.

    [Note: Annual declines in the Labor Force have occured only in the years 1943, 1944, 1945, 1951, 2009, 2010, and 2011. The declines of 1943 -1945 and 1951 were due to general declines in the non-institutional civilian population, due to war. However, the declines of 2009, 2010, and 2011 have occurred in spite of an increase of 5.8 million to the non-institutional civilian population over the period. The labor force continued to grow throughout the worst years of the Great Depression, yet according to what's being reported today, 6.5 million workers have left the labor force since 2009. This is an unprecedented and blatant manipulation of the the facts. The real unemployment rate isn't 8.5%, it's somewhere between 12.2% and 41.6%, the mean of which is 26.9%.]

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  3. Why is the data you have in your 2nd chart different than what BLS has? It is accurate until 2008.

    http://data.bls.gov/pdq/SurveyOutputServlet?request_action=wh&graph_name=LN_cpsbref1

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    Replies
    1. Because those were the numbers when I wrote this in January of 2012, but in January of 2013, BLS went all the way back to 2008 and revised the data. I have all the original downloads saved (same as what's printed above). Every January the BLS typically revises the previous year's numbers, but this year they decided to go all the way back to 2008. Why? Because all they release are estimates from surveys, but they rarely have all the date in when the reports are released, so they revise numbers periodically. Why did they go back 4 or 5 years this time? When you find out, let me know. I noticed that too, but most of the older changes involved just minor adjustments.

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