I’ve had lots of questions recently about the unemployment rate, how it’s measured and what it means. It is an important subject, but more complicated than it would first seem.

The Bureau of Labor Statistics calculates the unemployment rate from a series of monthly surveys. One set of surveys asks households about their work history, the other queries businesses. The two don’t necessarily match well for many good reasons. These two surveys are combined to give us the unemployment rate. This is formally the percent of unemployed persons actively seeking a job divided by everyone with a job plus those looking for a job. But there’s inevitably some important news missing from these data.

Because the data is from a survey, the local estimates, from county and city are subject to greater error than at the state or national level. This is such a critical factor that adjustments for seasonal variations are made months after the fact. By then statisticians and economists have an opportunity to compare the data to administrative records.

Perhaps the biggest problem is in estimating who is in and not in the formal workforce. Even in good times a surprising number of workers labor in the shadow economy, invisible to government statisticians. The best estimates of these I have seen suggest that something like 10 percent of US income occurs in this shadow economy.

Also, in this recession, much like in 1981 many workers have left the labor force. These folks come in three flavors. The first and most painful to the economy are those who take early retirement. The classic example would be a 59-year-old man in a manufacturing occupation who has lost a job, and finds it less disrupting to retire early than to move. A wonderful bluegrass tune called Aragon Mill captures the sentiment perfectly with the lyrics “I’m too old to change and too young to die.” This sad lament barely does justice to what the loss of skilled workers does to the economy.  

Another group is composed of those who’ve lost jobs and decided to stay home to help with family matters. These are increasingly men with small children – stay at home dads. This pays less, but matters more than most jobs. Finally, we see a lot more people remaining out of the labor force to pursue education. These are folks going back to school (as your columnist did in the wake of the 1991 recession) and those staying in school. This is good in the long term.  

We are now at the trembling edge of real job creation. Somewhere between 6 and 9 months after the end of the recession (which was most likely early last summer) job growth will commence in earnest. This will also be a time that workers will re-enter the job market. We will see several months of job growth and maybe some with rising unemployment rates. Things are getting better, even if warning clouds of deficit and inflation gather in the west.