America's unemployment rate as measured by the Labor Department vastly underrepresents the number of Americans actually out of work, hedge fund manager Kyle Bass told CNBC.

Earlier this month, the government said the nation's unemployment rate fell to 6.1 percent in August, while job growth cooled with just 142,000 nonfarm payrolls added.

"Look at unemployment, the way it's calculated is it's semi-rigged," he argued in a "Squawk Box" interview. "It will trend down to the 5 percent range just because people stop looking for a job."

"If you take everyone that has dropped out of the workforce since the beginning of the financial crisis," he continued, "the unemployment number would be 11 percent."