The Dow is Not the Economy

The Dow Jones Industrial Average reached and then slightly exceeded a top level reached in 2007:

October 9, 2007	14,164.53
March 5, 2013	14,253.77

This caused something of a hoopla in last night’s news coverage and in the headlines this morning. One reason for this is that the Dow Jones, the Nasdaq, and the S&P 500—all of which sum up the stock markets minute-to-minute during work days are the only ever really current statistical indicators. Therefore, certainly in the media, they are taken for an indicator of the Economy. But, of course, the Dow is not the economy. Not really. The speculative reactions of market traders to news of one sort or another, their “sense” or “smell” of what is happening—not in the real economy, where people live, but to the valuations of corporations, most of which are operating world-wide, are not really a measurement that indicates genuine values achieved—except to those who get all of their income from gambling on the market.

Above two real indicators. I’m showing median household income as one, the unemployment rate as another. Both are shown for the 2007 through 2012 period. Median means the household income at the very middle of the distribution. Thus half earn less, half earn more. In 2011, using Census data, the median income was $50,505. The Average household income, which reflects the huge incomes of the top 1 percent, is much higher. In 2011 it was $76,062.

These two indicators show that we are quite a long distance still, five years later, from the performance of the real economy in 2007. In that year the median was $55,039, the unemployment rate at 4.6 percent. In 2012 the corresponding values were $50,964 and 8.1 percent.

Listening to the coverage on Public Television last night, I heard again mentioned that there are two economies. The Dow reports on one, the economy of concentrated wealth. The household income and unemployment data report on the economy of ordinary people. One of the oddities of the laisser faire free market is that, without massive and energetic government intervention, it will trend toward monopoly power. Eventually, of course, when the population is impoverished, it wipes itself out.

The Deceptive Unemployment Rate

I have long viewed the Unemployment Rate as an awfully fuzzy concept, and that because “unemployment” as such is measured by the Current Population Survey rather than some more appropriate physical count. Yesterday’s BLS announcements were greeted with pleasure because the unemployment rate dropped from 8.5 percent in December to 8.3 percent in January. Here is a tabulation worth pondering:

(Data in 1,000s or %)
	Dec 2011	Jan 2012	% Change
Civilian Work Force	153,887	154,395	0.3
Unemployed	13,097	12,758	-2.6
% Unemployed	8.5	8.3	-2.9
Not in Labor Force	87,212	88,784	1.8
Not in Force but want to work	6,135	6,495	5.9
If Want to Work is added:
Civilian Work Force	160,022	160,890	0.5
Actual Unemployed	19,232	19,253	0.1
% Actual Unemployed	12.02	11.97	-0.2

The civilian work force is defined as those actually employed and the “unemployed.” The unemployed are those actively seeking jobs—as reported to the CPS, and the survey results are then extrapolated to the nation. Active job-seeking means that you have applied for a job in the last four weeks. The same survey, however, also tracks other categories. One of these is called Not in the Work Force. A subset of that is a rather large number of people who “Want to Work” but do not fit the “unemployed” category because they have not been out beating on doors, keyboards, or telephones to get a job last month. That number, 6.5 million in January, is suspiciously close to the 5.6 million jobs lost in the Great Recession but not yet regained.

Now consider the December to January changes. The Work Force grew by 0.3 percent, the number of “unemployed” decreased by 2.6 percent, and the unemployment rate dropped 2.9 percent. But those defined as outside the workforce but still “wanting to work” grew 5.9 percent in that month.

Next let’s restate those data and include those who want to work both under the Civilian Work Force and the Unemployed. That produces a truer picture. It would show that the number of unemployed actually grew (0.1%) but the unemployment rate went down marginally, by 0.2 percent.

I am still be displeased by this number because it is based on a survey. Instead I prefer simply to look at total jobs over time—and the total population aged 16 and over. That would at least be counted properly every 10 years.

German Unemployment Rate

Worth noting here that the unemployment rate in Germany dropped to 6.6 percent in December 2011. That made news in at least some German-language publications even in the United States. Looking backward in time, this rate turns out to be better than the rate had been in 1992 when, in January of that year, unemployment had stood at 7.3 percent. Available data don’t go back earlier than that. The Great Recession and its radiations? The Euro crisis? Well, Germany is coping, as one might say. And the name of the lady responsible for this starts with an M.

“Shadow” Unemployment

In yesterday’s post I summarized how the Bureau of Labor Statistics defines unemployment. To repeat that definition, someone is considered unemployed—and, importantly, therefore also counted as a member of the civilian labor force—if he or she is out of a job, seeking work, and available to work. Here the meaning of “seeking work” is important. The individuals has to have made an effort to get a job within the last four weeks. Note that this definition does not include “is receiving unemployment benefits now”; the individual may or may not be receiving benefits.

The definition of the labor force is Labor Force = those working plus those officially unemployed.

Very well. The BLS also tallies other categories of people the bureau defines as “Not in the Labor Force, Want a Job Now.” That’s a curious definition, isn’t it? What does it mean? It is the count of all those people who (1) are not working, (2) want to work, (3) are available for work, but (4) have not sought employment in the last four weeks. Using annual averages and seasonally unadjusted raw counts, in 2010 the officially unemployed were 14.825 million and the Want-to-Work but Not-in-Labor-Force were 6.059 million. That’s a lot of people. In 2011, using a 6-month rather than a 12-month average, the same numbers were 14.101 and 6.621 million. Put another way, instead 14 million people seeking jobs this years (so far), actually nearly 21 million people want to work. In 2011, thus far, the official unemployment rate is 9.2 percent. But if we add the shadow unemployed to the labor force as well, and then calculate the shadow unemployment rate, it stands at 13.5 percent.

Those 6.6 million Want-to-Workers break down into three categories. (1) Those who are not discouraged, (2) those who are discouraged—and it is because of discouragement that they did not seek a job in the last four weeks—and finally (3) those whom BLS labels “marginally attached to the labor force.” BLS defines such people as those who did not seek employment because of interfering tasks or conditions: school or family responsibilities, ill health, or transportation problems. The biggest category is the first, those who Want to Work but are not discouraged, 4.068 million, next are the “Marginals,” 1.598 million, and the smallest category is the Discouraged, 955,000. Herewith a graphic presenting all of these categories, including the officially unemployed, for the period 2001 through 2011 (6 months).

Looking at this chart I note that throughout this period the shadow unemployment is present, in good times as well as in bad. Source of the data is this BLS facility and others tables reachable from there. The number of those Officially Unemployed has grown at a rate of 7.6 percent a year, the number of Want-to-Workers in the shadow by 3.7 percent. Within this last broad group, those not discouraged grew 2 percent a year, those discouraged by a whopping 11.5 percent, and those viewed as on the margin at 5.4 percent a year. The discouraged are a visibly larger portion of total in the graphic in the last three years.

Through the 2001-2008 period, the difference between the official and the shadow unemployment rate was right around 3.2 percent. In 2001 the official rate was 4.7 percent, the shadow rate 7.9 percent. Beginning in 2009, the difference rose to 3.8, in 2010 to 3.9, and in 2011 to 4.3 percent. In that last year, the official rate was 9.2 and the shadow rate 13.5 percent. The shadow rate is calculated by defining the civilian labor force as made up of all those employed, all those officially unemployed, and all those who want to work but are excluded from the official definition of the unemployed.

As a general rule of thumb, therefore, we can mentally adjust the official rate by adding about 3 percentage points to it. And in dreary times like the current, it’s best to add 4 points to the official rate to stay in sympathy with those in the total population who want to participate in the so-called American dream—but cannot.

The Measurement of Unemployment

The unemployment figures published by the Bureau of Labor Statistics are often under attack for understating real unemployment. Why? People know that the BLS uses Unemployment Insurance (UI) data to determine who is unemployed. Thus people who have filed for UI or are receiving unemployment insurance payments are the unemployed. But what about people who never file or whose insurance has run out? Well the answer is that the BLS does use UI data—but it is not the only source of its information. The current figure, putting the unemployment rate at 9.2 percent in June 2011 comes for the hard counts (the UI databases maintained in every state) and from the soft counts derived from the Current Population Survey (CPS).

The CPS is conducted monthly and is based on a sample of around 60,000 households. These represent, using BLS’ own numbers, about 110,000 individuals—which contrasts favorably with the usual opinion poll sample of around 2,000 individuals. Like poll samples the 60,000 households are also selected very carefully to be representative of the nation as a whole. Each month a quarter of the sample is changed to keep it varied and representative. Thus, we might say, the CPS is a “super poll,” much larger than the usual, and therefore, from a statistical viewpoint, a pretty good indicator. Surveying every household, monthly—as these are surveyed one every 10 years in the census years ending in zero—would cost too much.

Questionnaires are built carefully to determine if the individuals interviewed meet the technical definition of “unemployed”—but without ever asking the person if he or she is unemployed. This is done so that arbitrary definitions of unemployment, whether in the minds of the person questioned or the interviewer, distort results. People interviewed are then, later, classified by status using their answer to questions.

The technical definition of someone unemployed, put briefly, is a person who is jobless, is looking for work, and is available to work. The interviews are also structured in such a way that individuals who are jobless and available for work but have stopped looking for work can also be identified and counted. These are the shadow-unemployed, those who’ve given up looking. The numbers we sometimes see for this cohort also come from the CPS and also have an objective basis based on a structured sample.

The CPS data, being a sample, can, however, be extrapolated to the population as a whole—using the same methods pollsters use to tell us what we, Americans, thing based on talking to 2,000 people. The 9.2 percent number from the BLS, therefore is a pretty good number. It approximates the actual number of people who are looking for work and available. That number, added to those countably employed, also produces the estimate of the civilian labor force.

The CPS actually produces six different categories on unemployed persons, labeled U-1 through U-6. Here they are:

• U-1: Persons unemployed 15 weeks or longer, as a percent of the civilian labor force
• U-2: Job losers and persons who completed temporary jobs, as a percent of the civilian labor force
• U-3: Total unemployed persons, as a percent of the civilian labor force (the official unemployment rate)
• U-4: Total unemployed persons plus discouraged workers, as a percent of the civilian labor force plus discouraged workers
• U-5: Total unemployed persons, plus discouraged workers, plus all other “marginally attached” workers, as a percent of the civilian labor force plus all “marginally attached” workers
• U-6: Total unemployed persons, plus all “marginally attached” workers, plus all persons employed part time for economic reasons, as a percent of the civilian labor force plus all “marginally attached” workers.

Data I found for May 2008 at the same place where these definitions appear (link) show the following unemployment rates:

This shows that the maximum unemployed rate may be nearly double the official rate. These data are regularly published but not publicized. The government is in conflict with itself. It wants to project optimism but does not wish to publicize bad news in too loud a voice. Soon I will show what these numbers look like over time.

Core Unemployment

All through my working years, I kept hearing it repeated that a certain level of unemployment was unavoidable in any free economy. It was loosely referred to as “core unemployment.” It was said to be somewhere between 4 and 4.5 percent. The technical name of this kind of unemployment is “frictional” unemployment—meaning that it takes people who lose their jobs to find new ones—and for employers who lose their employees involuntarily to replace them.

I found the following useful definition of that adjective in a Bureau of Labor Statistics paper here, attributed in a quote to Frank C. Pierson of the W.E. Upjohn Institute for Employment Research, 1980:

Unemployment can be said to be structural in nature if aggregate demand is high enough to provide jobs at prevailing wages for everyone seeking work but job openings remain unfilled because of a persistent mismatching of skills or geographical locations. If the mismatching is resolved voluntarily through mutual search by workers and employers in a reasonably short period of time, say 8 or 10 weeks, the resulting unemployment falls in the frictional category.

Frictional unemployment is not reported by BLS as such, but the agency does provide unemployment by duration. With that in mind I plotted unemployment for the period 2001 through early 2011 by categories of duration: less than 5, 5 up to 15, and 15 weeks or longer. Here is the result:

As always in these contexts, unemployment is nonfarm unemployment. (The reason why farm employment gets a pass is itself an interesting subject I might take up one of these days.) Data are from this BLS facility. The graphic presents an interesting picture. Short-duration unemployment is essentially flat, and asking for a trend line for this period, I found it absolutely flat. It is affected by recessions, shown in shaded areas, but not a great deal. Unemployment at longer durations, particularly the gut-grinding 15-weeks and over, are a much better indicator.

Frictional or core unemployment—thus the more or less unavoidable kind, is minimally described by the black line. In this 123-month period, it produced an average unemployment for the period of 1.9 percent. The 5-to15 category, averaged 2.6 percent, the two together 4.4 percent. Perhaps there is something to the common wisdom that “core unemployment” runs about 4.5 percent. In this same period, the longest duration (15-weeks or greater) averaged 1.7 percent unemployment. And that category, signals genuine problems: a shrinking of available jobs.

I find it amusing that Frank C. Pierson (above) described structural unemployment as employers unable to find employees in 1980—when, in the year before, unemployment averaged 5.9 percent—whereas I see structural unemployment in 2011 as employees seeking jobs that simply aren’t there—when, in the year before, I see unemployment averaging 9.6 percent.

Unemployment: Long-Term Trend

I undertook the tedium of charting unemployment, by month, from January 1948 until March 2011 using data obtained from a Bureau of Labor Statistics facility here. These data, like all employment and unemployment data always, refer to nonfarm employment. I’ll show the data first then them make some comments.

Two rather interesting facts become apparent. One is that our current recession was not the most dramatic—at least not if viewed through the unemployment lens. We experienced the worst unemployment in this 63-plus-year period in November and December of 1982, spilling over into 1983. Beginning in September of 1982 and ending in June of the following year, we had a period of ten months in which unemployment exceeded 10 percent, reaching 10.8 in the peak months already noted. The lowest rates we’ve experienced in this period came in May and June of 1952, 2.6 percent in each of those months. In the 1952-1953 years, we had thirteen months in which unemployment was less than 3 percent. Our own highest, in this set of numbers, came in October 2009 (10.1%). The rate reached 10 percent only in that one month throughout the 2007-2011 period. Now some people say that many are giving up and therefore are not even counted among the unemployed—and that may be true.

The second interesting observation here is the trend, marked in red. It is based on 759 monthly data points, hence it is not a trivial calculation. The trend shows that unemployment levels have been steadily rising. Until about 1987, we could expect unemployment rates to be nearly 5 but under 6 percent. After that our expectations must be for a sustained unemployment level over 6 percent—and rising.

The economy needed more people to sustain it in the early part of this history than it now needs. What happens to the people who’re no longer needed?