Is Unemplyoment Really Improving?
- “The unemployment rate fell to 8.6% … This is the lowest rate in two years.”
If you take look at the unemployment statistics reported by Washington, you might think that the economy is turning around.
We decided to dig into these figures and see what they are really saying.
The results may surprise you …
The Unemployment Rate – Simple Math
Let’s take a quick look at how the unemployment rate is calculated:
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Unemployment Rate = Unemployed Workers / Total Workers
Here’s an example: Let’s assume you have a country with 1000 people:
- Total Workers = 600 (the other 400 people are children, students, retired, or unable to work).
- Unemployed Workers = 60
- Unemployment Rate = 60 / 600 = 10%
If 5 jobs are added, the number of unemployed workers drops to 55, and the unemployment rate falls to 9.2% (55 / 600).
8.6% — You Must Be Kidding!
Here in the United States, there is a little trick to the unemplyoment rate calculation. The rate can fall because new jobs were added (like in our example above), or because the number of Total Workers falls.
Continuing with the our example, let see what happens when the number of Total Workers falls:
- Total Workers = 590
- Unemployed Workers = 50
- Unemployment Rate = 50 / 590 = 8.5%
As you can see, when 10 Unemployed Workers “decide to leave the work force” the unemployment rate suddenly improves.
Did You “Leave The Workforce”?
What the government statistics show is that the workforce got smaller. They say that this is because people retired, or “gave up looking for work”. As a result, the unemployment rate appears lower, which suggesting that the economy improved.
The Bottom Line
The good news is that there were approximately 120,000 jobs created last month. This is real progress.
The Unemployment Rate, fell, in part, due to an increase in the number of Americans who “decided to leave the workforce”.
What are your thoughts on these government statistics? Feel free to leave a comment below.