As of this writing, the official unemployment rate (for December ’10) is 9.4%. It’s pretty popular to talk about the Fed’s (new) mandate to raise employment in the MSM but before they can figure that out, I think it’s about time they were honest about where the unemployment rate really is. The way unemployment is calculated is a little misleading, with some unofficial surveys finding rates closer to 22%. In comparison, during the Great Depression, unemployment reached a height of 25%. So what I want to do in this post is to try and show the different ways official unemployment is calculated. I’m going to take the definitions of each of the 6 calculations (which are pyramid shaped, cumulatively speaking) the Bureau of Labor Statistics uses from Wikipedia to avoid any controversy. Let’s start at the top…

U1: Percentage of labour force unemployed 15 weeks or longer.

By this definition, you are only considered unemployed if you haven’t had a job for just under 4 months.

U2: Percentage of labour force who lost jobs or completed temporary work

Those who have just lost their jobs and people who are working at a temporary job.

U3: Official unemployment rate per the ILO definition occurs when people are without jobs and they have actively looked for work within the past four weeks.

This is the official unemployment number that is currently at 9.4%

U4: U3 + “discouraged workers“, or those who have stopped looking for work because current economic conditions make them believe that no work is available for them.

What this means is that people who have stopped looking for work after having lost their jobs, for whatever reason, are not included in the total pool of people in the labor market. In other words, these people do not exist as people who could be employed in the eyes of the government, which effectively pads the 9.4% and removes people that would otherwise make this percentage higher, despite the fact that they still do not have a job.

U5: U4 + other “marginally attached workers”, or “loosely attached workers”, or those who “would like” and are able to work, but have not looked for work recently.

So I don’t mess this up, straight from the BLS website, the definition of “marginally attached workers” is

Persons not in the labor force who want and are available for work, and who have looked for a job sometime in the prior 12 months (or since the end of their last job if they held one within the past 12 months), but were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey. Discouraged workers are a subset of the marginally attached.

Pretty long winded and contrived if you ask me. These people are also taken out of the padded U3 number and, again, still technically do not have a job.

U6: U5 + Part time workers who want to work full time, but cannot due to economic reasons (underemployment).

Now, although these people are technically employed, it should be noted that in most cases these are either seasonal or temporary jobs. This is the broadest, most concise picture of the total people who are “under-employed”.

Basically what I want to illustrate here is that although it looks like the unemployment rate is getting chipped away (9.8% to the now 9.4% a month later) and the talking heads on CNBC will tell you that this is obviously a clear sign the economy is recovering, it’s actually far more likely that people have just been taken out of the labor force because they are either ‘marginally attached’ or just plain ‘discouraged’ and haven’t been looking for a job.

This will be the first part of a series of how government stats are, at best, misleading, and at worst, down right destructive.

Part II? CPI.