Is the Official Unemployment Rate Misleading? A Look at Labor Market Statistics over the Business Cycle

Article excerpt

Introduction and summary

In recent years, both economists and the popular press have asked whether the measured unemployment rate is "too low." In particular, observers question whether current unemployment rates accurately reflect labor market weakness. By some conventional measures, the most recent recession was relatively mild. The official unemployment rate rose to a high of 6.3 percent in June 2003, which is low by historical standards (see figure 1), and real gross domestic product (GDP) declined by only 0.5 percent, compared with a 1.3 percent decline in the 1990-91 recession and an average decline of 1.1 percent during previous recessions from 1960 to 1981. At the same time, others have argued that this latest recession was not as mild for labor markets as suggested by the maximum unemployment rate level. Most point to the fact that based on payroll employment numbers, there were 1.8 percent fewer jobs in January 2004 than in March 2001. At the extreme, Austin Goolsbee suggests that

   ... the unemployment rate has been low only
   because government programs, especially
   Social Security disability, have effectively
   been buying people off the unemployment
   rolls and reclassifying them as 'not in the
   labor force.' In other words, the government
   has cooked the books.... (1)

In this article, I focus on whether the current unemployment rate accurately reflects labor market strength, particularly when compared with the 1990-91 recession. There are many reasons to believe that unemployment rates may not be comparable over time. Fortunately, although the unemployment rate and jobs growth are the headline numbers of the monthly Bureau of Labor Statistics (BLS) Employment Situation release, the release provides many other statistics that one can use to put the unemployment rate into a broader context, as well as to measure labor market strength in ways that may be more comparable over time. In particular, data on employment-to-population rates and those not in the labor force are useful for considering the relative strength of the labor market over time.

Currently, there is evidence that the official unemployment level may be lower than in earlier periods, in part due to factors affecting the labor force rather than factors affecting labor market strength. However, other evidence on labor market strength does not support the argument that the current labor market is weaker than that following the 1990-91 economic recession. Indeed, along several dimensions, the current period of economic recovery reflects stronger labor markets than in several previous recovery periods: Employment to population rates are high; the percentage of workers not in the labor force who say they want a job has not increased; and real hourly and weekly earnings are higher relative to levels at the peak of the business cycle in 2001.

Below, I begin by discussing why many believe that the official unemployment rate may not accurately affect labor market strength, how the official unemployment rate is measured, and what factors affect its measurement. Next, I consider how the most recent economic recession and recovery period compares with past recession and recovery periods when I look at alternative measures of labor market strength.

Measuring unemployment

Figure 1 displays the seasonally adjusted, "official" monthly unemployment rates from the BLS from January 1948 through January 2004. Areas shaded in gray represent periods of economic recession as dated by the National Bureau of Economic Research (NBER), and a list of the monthly peak and trough dates can be found in table 1.2 Following the 1991 recession, the unemployment rate peaked at 7.8 percent. Following the 2001 recession, the unemployment rate peaked at only 6.3 percent. Both recessions have been characterized as relatively mild. In fact, 6.3 percent unemployment is relatively low compared with maximum unemployment rates reached following other periods of economic recession over the past 40 years (7. …