4/9/13 10:07 AM – Unemployment Rate – What is is Really?

Things are not always what they seem, Alice. Since last Friday’s unemployment rate shook people up some and is in the news, let’s see if it really tells the story.

Below are two charts from the Federal Bureau of Labor Statistics current website http://data.bls.gov. The period covered is the last ten years.

BLS Official Unemployment Rate Chart

This is the unemployment rate that is routinely reported in the news. Looks like great news overall, even if the latest report was disappointing.

Now take a look at the flip side – the percentage of people working.

As you can plainly see, the percentage of the working age population, defined as ages 16-64, that is actually working has been going down over the same time period. That percentage is now down to 63%.

Wait a minute.How can the unemployment rate be dropping when the percentage of people working is also dropping? The answer – people who have given up looking for work are not counted as unemployed in the unemployment rate but they are counted in the participation rate. Since it is ludicrous to not count them, the participation rate is by far the more accurate measure of the two.

Bottom line: unemployment has not gotten better the last ten years or even since 2009; it has actually gotten worse.

What this means for investing is that we should not expect great things from our economy while the percentage of workers is dropping. The reason the economy is not doing worse than it is, is due to immigration and the fact that people are still having babies that grow up to be of working age. So, while the percentage of workers working is going down, the number of people working is not.

This means we should think of immigration as benefiting our economy. We should also note the pressures that come from so many people not working, such as less spending, and the burden of supporting non-workers as falling on the shoulders of a declining percentage of the workforce. This has big implications for the sustainability of Social Security, Medicare and other entitlement programs.