Real Unemployment Rate Reveals a Labor Market Still Struggling

President Obama continues to insist that the country is better off today than when he first took office. While there are many different indicators that say otherwise, the president and his allies in Congress and elsewhere continue to point to the labor market, specifically the unemployment rate, for validation.  The latest report from the Bureau of Labor Statistics (BLS) has the unemployment rate marked at 6.1 percent. Indeed, this is the lowest that the rate has been in six years and it is now equivalent to the unemployment rate of August 2007, the month the financial crisis began. The president and his progressive allies see this as a sort of “Mission Accomplished” moment, a vindication for years of aggressive government intervention and deficit spending to the tune of nearly $7 trillion. The problem for them, and the entire country for that matter, is that the unemployment rate as calculated by the BLS leaves much of the story untold.

The ‘official’ unemployment rate can be found by looking at the employment population ratio (EPR) and the labor force participation rate (LFPR). The EPR is the percentage of the entire population that is employed in some capacity, while the LFPR is the percentage of the population that is either employed or actively seeking employment. The difference between them is thus the unemployed. Dividing the EPR by the LFPR multiplied by 100 will give you the employment rate, from which the unemployment rate easily derived by subtracting the employment rate from100.

EPR/LFPR x 100 = Employment Rate
100- Employment Rate = Unemployment Rate.

For June 2014, the EPR was 59 percent. The LFPR was 62.8. So let’s plug those in:

59/62.8 = (roughly) .939
.939 x100 = 93.9
100-93.9 = 6.1

The key detail that gets left out when politicians like President Obama discuss the unemployment rate is that the labor force participation rate (LFPR) is not static. In fact, over the course of the last six years, the LFPR, which again is the percentage of the population that is working or looking for work, has plummeted to 30+ year lows. This means that many Americans that lost their jobs during the “Great Recession” may have given up looking for work altogether, and are thus not factored in to calculating the unemployment rate. To gauge the real vitality of the labor market and the efficacy of the administration’s efforts to get Americans back to work, we need to calculate what the unemployment rate would be if those displaced Americans hadn’t given up looking for work. To do so, we simply need to plug in a previously recorded LFPR. In January of 2009, when Obama first took office, the LFPR was 65.7 percent. Plugging that into the equation with today’s EPR gives us something closer to a ‘real’ unemployment rate:

59/65.7 = (roughly) .898
.898 x 100 = 89.8
100 – 89.8 = 10.2

As you can see, the unemployment rate would be substantially higher, at 10.2 percent, if it was adjusted to compensate for Americans that have been displaced from the labor force altogether. This collapse of nearly 3 percentage points in the LFPR may not seem significant, but on the basis of our national population that 3 points is well over 9 million people.

Indeed the official unemployment rate has fallen and some of that is due to marginal improvements in the labor market. However, to take the 6.1 percent ‘official’ rate at face value and parade it out as proof that six years runaway regulation and spending somehow worked is irresponsible. And given the ease with which the real unemployment rate of 10.2 percent can be ascertained, it’s almost purposefully dishonest.