“The U.S. economy added 280,000 jobs to non-farm payrolls in May, according to the Labor Department. It was the largest increase since December and exceeded the 225,000-job uptick that economists polled by Reuters had expected. The unemployment rate climbed to 5.5%, suggesting that more people entered the labor force.” – Wall Street Journal June 5, 2015
There is a lot of noise being made about the recent announcement of the 5.5% unemployment rate for May 2015. People have short memories and forget that back in 2007, when the unemployment rate was around 4.7% and moved to 5.0%, it was considered the beginning of the great recession. Now 5.5% is supposed to be a booming economy. Go figure!
A booming economy should be felt. There is no need for economists to tell us when the economy is booming. Why is it that the 5.5% unemployment rate does not feel like a booming economy? Could it be that we are being presented an incomplete picture of the unemployment rate?
What is the unemployment rate?
The unemployment rate is one of the indicators of the health of the labor market. It is one of the strongest drivers of the U.S. stock market. The unemployment rate is a measure of the prevalence of unemployment and it is calculated as a percentage by dividing the number of unemployed individuals by all individuals currently in the labor force. It reflects the strength or weakness of the American workforce. However, to be counted as unemployed as defined by the Bureau of Labor Statistics (BLS), you must meet the following three conditions:
1. You do not have a job;
2. You have actively looked for a job in the past four weeks; and
3. You are currently available for work.
The above is the criteria for the “official” unemployment rate published each month, also known as U-3. The BLS actually publishes six unemployment rates (U-1 to U-6), where U-6 is the most comprehensive measurement of unemployment. Many economists and financial experts refer to it as the “real” unemployment rate. The U-6 includes not only the people that looked for a job in the past four weeks, but those who looked for a job in the past twelve months and still unemployed. It also include those who “settled” for a part-time job for economic reasons. How many people do you know that have taken part-time jobs and/or underpaid jobs to meet financial demands? Even though these people are struggling financially, they are excluded from the calculation of unemployment which can give the wrong appearance of our current economy and an illusion of prosperity. However, ask those families, who are struggling financially right now, about the reduction in unemployment rate and what it means to them.
Is the U-3 much different than the U-6?
As you can suspect, the answer is yes. For example, the U-3 and U-6 for May 2015 released by the BLS were 5.5% and 10.8% respectively. While both rates have decreased since May 2014 when the U-3 was 6.1% and the U-6 was 11.7%, in my opinion the U-3 does not reflect the current situation of our labor force or at best it provides an incomplete picture. This is the reason why the 5.5% unemployment rate does not feel like a booming economy.