What is the True Unemployment Rate?
There has been a lot of talk about the validity of the government generated unemployment numbers created by the U.S. Bureau of Labor Statistics (BLS) lately. (And not just by me!) Every month I tell you that we look at the Employment numbers rather than the Unemployment Rate because they are much more accurate. We’ve looked at Employment vs. Unemployment and we’ve looked at U-6 (total labor force including those who’ve given up looking) vs. U-3 (those who are still actively looking). The U-3 unemployment rate is the commonly quoted one. But the one problem is that all that data comes from the government. If they are fudging the numbers how would we know? Unless as we’ve noted before there are inconsistencies between the Unemployment and Employment Charts. But finally we have an alternative source of information.
In an effort to determine the True Unemployment Rate the Gallup survey people began doing their own survey on unemployment rates back in 2010. So we can compare their results with the results the BLS publishes.
In this first chart, we have BLS U-3 Unemployment rates (both Seasonally Adjusted and Unadjusted) along with the Gallup Unadjusted Unemployment rate. In this series Gallup is using similar criteria to the U-3 so we can compare apples to apples. Note that in the most recent couple of months Gallup is diverging from BLS moving higher while the BLS moves lower.
Click Chart for larger image
In this jumble it is hard to determine whether the BLS numbers are providing the True Unemployment Rate or not. We can see that the Gallup numbers start out significantly higher at the beginning and are also higher in the middle but there are also points where they are actually lower so it is hard to determine whether the BLS is fudging or not. So let’s break it down a bit. Let’s look at only the Unadjusted Unemployment Rate. I always prefer to see the data before the BLS “adjusts” it for “seasonal” reasons. So we will look at the BLS and the Gallup Unadjusted numbers for Unemployment.
True Unadjusted Unemployment Numbers according to BLS and Gallup
Click Chart for larger image
In this chart we can see that the Gallup numbers are frequently higher than the BLS numbers but they are occasionally lower as well, so it is difficult to tell if the data is significantly different.Coincidentally, this month, the Gallup unadjusted and the BLS adjusted numbers are the same.
Let’s look at the actual data.
|BLS Unadjusted||Gallup Unadjusted||Difference||Gallup Higher||BLS Higher|
|Sum 7.2%||Ave. 0.4167%||Ave. -0.312%|
In the fourth column marked “Difference” I’ve subtracted the BLS number from the Gallup number. This will result in a positive number if the Gallup number is higher and a negative number if the BLS number is higher. Theoretically, if the data collection methods are equal and the difference in the numbers is just based on random gathering differences, the Gallup number should be higher 50% of the time and the BLS number should be higher 50% of the time, right? Also the amount of difference between the numbers should be equal. So the average of the positive numbers should equal the average of the negative numbers.
So What are the Results?
First of all, we find that out of 44 data pairs the BLS number was higher only 15 times and the Gallup number was higher much more often at 28 times and 1 time the results were the same. This definitely sounds like the BLS numbers are lower for some reason other than random chance. Next, we look at the average variation and we see that when the BLS is higher the average variation from the Gallup numbers is 0.312% but when Gallup is higher the average difference is 0.4167%.
So not only do the Gallup numbers come out higher more often, the amount of difference is higher as well. From the table we can see that when you add up all the negatives with all the positives the difference is 7.2 percentage points. If the methods were equivalent you would expect the positives to cancel out the negatives and the total would be zero. So the BLS has underestimated the Unemployment rate by a cumulative total of 7.2% percent compared to the Gallup numbers from 2010 through October 2013.
The True Unemployment Number– Conclusion
Although the difference isn’t massive it does appear that the BLS numbers is biased to the low side compared to the independently surveyed Gallup numbers. The average amount the BLS numbers come out below the Gallup numbers is roughly 0.157% (Difference Average) so in other words if the BLS says the unemployment rate is 7.8% on average Gallup would say the True Unemployment Rate was really 7.957%.
But this does not take into consideration the other major problem that most people cite when they are concerned about the true unemployment rate and that is all the people who have stopped looking for a job. For more information on the people who have stopped looking you need to look at the U-6 unemployment rate. See: What is U-6 Unemployment?
There is also some evidence that a factor like Obamacare is causing a shift in the number of part-time employees (reducing the number of hours worked per employee) so the number of part-time workers necessary is increasing. See Unemployment, Part-time Workers and Obamacare.
Source: US Bureau of Labor Statistics and Gallup Pollsters.
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