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 the BLS has started to recognize reality and so the red line is converging with the green line. In a perfect world with unbiased information the two lines should be identical.
Click Chart for larger image
In the beginning of 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 higher at the beginning and are also higher frequently throughout but there are also a few points where they are actually lower so it is hard to determine whether the BLS is fudging or not. But in a few months of 2014 the BLS numbers seem to take a break from reality as they continue to fall while Gallup numbers are considerably higher. But in the last couple of months the BLS numbers have finally adjusted to reality.
Next, 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 occasionally higher than the BLS numbers but they are occasionally lower as well, so it is difficult to tell if the data is significantly different. At first glance they appear to track pretty well until the middle of 2013 when they start diverging drastically making you wonder what planet the BLS is living on. And for the first time in a year the BLS numbers are very close to the Gallup numbers and for the first time in a year and a half the BLS numbers are actually higher than the Gallup numbers. Although when looking at the first chart we can see that the “adjusted” numbers still lack a bit in the relation to reality.
Let’s look at the actual data.
|BLS Unadjusted||Gallup Unadjusted||Difference||Gallup Higher||BLS Higher|
|Sum 15.50%||Ave. 0.5359%||Ave. -0.284%|
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. 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 54 data pairs the BLS number was higher only 16 times and the Gallup number was higher much more often at 36 times and only twice 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 0.284% but when Gallup is higher the average difference is 0.5359%.
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 15.5 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 15.5% percent compared to the Gallup numbers from 2010 through the present.
The True Unemployment Rate– Conclusion
Although up until recently the difference wasn’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 0.222% (Difference Average) so in other words if the BLS says the unemployment rate is 6.0% on average Gallup would say the True Unemployment Rate was really 6.222%. But on four occasions recently August and November 2013 and January and April 2014 the difference has been significantly more than 1% i.e. 1.4%, 1.6%, 1.6% and 1.2% respectively.
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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