This is the real unemployment rate: What's Behind the Numbers?

Wednesday, November 18, 2015
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What's Behind the Numbers? allows authors to provide additional insight and an explanation into how they arrive at their conclusions. It consists of the data files, calculations, and other materials that inform the analysis but do not traditionally fit into an op-ed.


Edward P. Lazear stated that October’s unemployment rate stood at 5 percent in his piece, This is the Real Unemployment Rate, in the Washington Post. However, the unemployment rate may not be indicative of labor market strength. Other indicators of labor market activity, especially hiring, imply that the unemployment rate number comparable to past rates is actually around 6.3 percent. Is the unemployment rate higher than it appears, or is the employment rate too low to reflect the appropriate strength of the labor force?

Table 1: Summary Statistics Data from January 1999, to December 2015.
Source: Bureau of Labor Statistics, November 2015 and U.S. Census Bureau, Current Population Survey, Annual Social and Economic Supplement, 2003.

Part of the difference between the two reflects demographics, which affects the employment rate directly. An older population means that more people are retired, and more retired people yields a lower employment rate because a smaller fraction of the population is typical working age.

Table 2: Percent of Working Age Population Between 45 and 64 Years Old Source: U.S. Census Bureau, Current Population Survey, Annual Social and Economic Supplement, 2003.

To determine whether the measured unemployment or measured employment rate is too low, another indicator that is more directly related to labor market demand conditions can be used. I use the “population hiring rate,” which I create from Bureau of Labor Statistics data.  It is defined as the ratio of monthly hires (from the Job Openings and Labor Turnover Survey) to the population over 16 years of age. The hiring-rate peak, annualized, was 34 percent, in November 2006 and its low was 22 percent in June 2009. The current population hiring rate is 28 percent, or about half of the way back to the peak rate. Using pre-October 2009 data I estimated the true unemployment and employment rates, according to the following specification.

  1. Unemployment Rate = a + b(JOLTS hires/working age population) + c(proportion of mature labor force 45-64 years old)
  2. Employment Rate = a + b(JOLTS hires/working age population) + c(proportion of mature labor force 45-64 years old)

Table 3: Estimating the Unemployment and Employment RatesSource: Bureau of Labor Statistics, November 2015

Figure 1: Estimation of the true unemployment rate if we were in the pre-2009 era with today’s hiring rate and demographic conditions, based on estimated values from the regression in Table 3.
Source: Bureau of Labor Statistics, November 2015

Analogously, the peak pre-recession employment rate was 63.4 percent. Correcting for hiring and demographics makes September's rate of 59.2 equivalent to a pre-2009 rate of 61.4 percent, meaning we still have a 2 percentage point deficit when compared with the earlier peak.

Figure 2: The employment rate, corrected for hiring and demographics estimated from the regression in Table 3, compared with the pre-2009 BLS peak
Source: Bureau of Labor Statistics, November 2015

With a pre-recession peak employment rate of 63.4, we still have a 2 percentage point deficit. The economy has added 12.7 million jobs. However, the deficit of 2 percentage points means that to keep pace with the growing population and make up for the recession, the economy should have grown by 17.5 million jobs (multiply the working age population of 240.492 million by the 0.02 deficit to get a jobs deficit of 4.8 million).

We have come back considerably from the depths of the recession that began almost eight years ago. Unfortunately, we still have a way to go.

Note: The data are taken from the Bureau of Labor Statistics, with information current as of November, 2015. All calculations made in this piece can be recreated with these data

Read the complete article, This is the Real Unemployment Rate, by Edward P. Lazear in the Washington Post.