Friday, April 6, 2012

Here is concise explanation how the unemployment rate is calculated and some of its pitfalls. Also links to todays report and analysis.

Below is an easy to read summary from the WSJ of how the unemployment rate is calculated and some of the "myths" associated with its calculation. Here is a link to the report released today.  HERE is a link to a website that gives nice, short, objective summary of various economic reports and releases.
All the statistics the government collects on macroeconmic activity (i.e. GDP, Inflation, Unemployment, etc) are subject to constant revision and interpretation. In laymens terms, they have literal and figurative holes in them big enough to drive  Mac Trucks through.
To get a better understanding of the economic situation you MUST go beyond the "headline" number touted by the media and look closer at the compostion of the actual published reports.  There IS gold in them thar' reports. 
Economists and non-experts alike pore over the government’s jobs numbers each month for hints about where the economy is headed. But confusion about how the statistics are calculated has led to some myths about the report and what it shows.


First, the basics: Every month, the government conducts surveys of households and employers, which form the basis of the main employment statistics. Under government definitions, which date back to the Great Depression, people count as employed if they’re doing any work for pay at all, and as unemployed if they aren’t working but are trying to find a job. People who aren’t working but also aren’t trying to find work aren’t considered part of the labor force at all.
Four common unemployment myths:
I don’t receive unemployment benefits, so the government doesn’t count me as “unemployed.” The official unemployment rate is based on a survey of about 60,000 households, not on unemployment benefits, which are administered by the states. The unemployment rate includes people who aren’t eligible for benefits, such as people who quit their jobs voluntarily, people who are entering or re-entering the work force (after graduating from high school or college, for example, or after taking time off to raise a child), and people whose benefits have expired. But it also might not include some people who do qualify for benefits: Someone doing odd jobs while collecting unemployment benefits will qualify as “employed” in government statistics.

I’m a contractor, not an employee, so the government doesn’t consider me “employed.” Anyone who has done any work for pay in the relevant week is considered employed, whether an employee, a contractor or self-employed. That includes informal work, such as child care or handyman-type jobs. Even work for “in-kind” pay, such as room and board, counts as employment. Owners of for-profit businesses are employed too, even if they don’t pay themselves a formal salary, and people who work at least 15 hours a week for a family-owned business or farm count as employed, even if they aren’t paid at all.
More than 350,000 people a week are getting laid off, so the unemployment rate should be rising. The U.S. added 120,000 jobs in March, and has averaged 154,000 jobs over the past six months. That’s a lot less than the 350,000 to 400,000 people who file first-time claims for unemployment insurance each week, which can make it sound like employers are shedding jobs on balance.
The figure reported in the monthly jobs report, however, is a net number, taking into account both hires and layoffs. So if the report says the economy “added” 120,000 jobs, that means employers hired 120,000 more people than they laid off. The figure is based on a monthly survey of 160,000 businesses and government agencies, which is conducted separately from the survey of households. Employers are asked how many workers they have, and whether they’ve gained or lost employees in the past month. Those answers are used to calculate payroll figures for the entire economy.
The unemployment rate is the best way to gauge the health of the labor market. The unemployment rate is the mostly widely followed labor market gauge, but it isn’t the most complete. Especially in tough economic times, plenty of displaced workers don’t count as “unemployed.” For example, someone who is laid off from a job and decides to go back to school doesn’t count as unemployed because he isn’t currently looking for work. The same is true for someone who gives up looking because he doesn’t think any work is available. Meanwhile, someone who takes a part-time job to make ends meet counts as “employed,” even if he is working just a few hours a week.
The Labor Department tries to track people who fall outside the traditional categories. People who aren’t actively looking for a job but want one and are available to work are counted as “marginally attached” to the labor force. People who are working part-time because they can’t find a full-time job are counted as “part-time for economic reasons.” In March 14.5% of workers fell under the broadest gauge of un- and under-employment, which includes both categories.
There’s also another way to measure the labor market: count the employed, not the unemployed. Many economists prefer this method, because there’s less gray area over who should count as employed, and less of a likelihood of bad news masquerading as good news. If lots of unemployed people give up looking for work, for example, the unemployment rate will fall, but the employment rate won’t rise. That may be what’s happening now — the share of the population that’s working plummeted during the recession and, unlike the unemployment rate, has barely recovered since then. But the falling employment rate could also reflect demographic shifts, such as an aging population.

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