Why the real unemployment rate is probably over 11%

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People wait in their cars in line to collect unemployment forms in Hialeah, Florida.CHANDAN KHANNA / AFP via Getty Images

The official unemployment rate fell to 8.4% in August, as businesses continued to roll out wide shutdowns imposed at the start of the coronavirus pandemic, the Bureau of Labor Statistics reported on Friday.This is the lowest rate since unemployment exploded in April, to levels not seen since the Great Depression. It would also mean that the official rate has fallen below the peak seen during the country’s latest slowdown, known as the Great Recession.

But August’s real rate is likely much higher than the official figure – possibly even exceeding 11%, according to labor economists.

The unemployment rate is a measure of unemployment in the country and a rough barometer of financial hardship.

Unemployment rate of 11.1%

There are several reasons why the real unemployment rate for August is likely higher than the official rate of 8.4%.

On the one hand, there is an ongoing problem with data collection since the start of the pandemic regarding workers on leave.

The BLS determines the unemployment rate based on a survey of US households. Those conducting the survey sometimes misclassified workers as employed but absent from work instead of unemployed on temporary layoff, according to the bureau.

Time off work – a category that includes people on vacation or sick leave, for example – does not increase the unemployment rate. A temporary layoff, or leave, however, increases it.

The unemployment rate would have been about 0.7 percentage points higher than that reported in August – or about 9.1% – if this misclassification had not occurred, according to the bureau.

The real figure would have been even higher taking into account people who dropped out of the workforce, economists said.

These people may have been discouraged from looking for work due to the sluggish labor market, or may not have been able to look for work due to health or childcare reasons, for example.

This is important because the federal government does not consider people to be unemployed if they are not in the workforce. To be counted in the labor force, people must be available for work and actively seeking employment.

“One of the things that a lot of people seem to have missed is that the unemployment rate doesn’t count people who aren’t looking for work,” said Michael Farren, economist at the Mercatus Center at George Mason University.

There were about 164.5 million people in the workforce in February, before state governments shut down large sectors of the U.S. economy. That figure fell by about 8 million, to 156.5 million people, in April.

“You didn’t have 8 million people who immediately decided, ‘I’m going to retire instead of facing this pandemic,’” Farren said. “It might have been a small subset of that number, but most of those people are permanently laid off. ”

The size of the labor force has since fallen to 160.8 million in August – still about 3.7 million people below the pre-pandemic figure.

If these people were considered unemployed, the official unemployment rate would be 11.1%, Farren said.

This analysis is “static”, meaning that it does not take into account other factors that may have influenced the size of the labor force, such as high school graduates looking for work. That kind of “dynamic” analysis would likely raise the 11.1% figure by a few more tenths of a percentage point, Farren said.

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