What Does the Unemployment Rate Really Tell Us?
Last week we talked about the recent not-so-good news on the U.S. economy and dove deep into why GDP is used as a metric and how it can be misleading.
This week I’m going to share more about another metric that is getting a lot of attention these days: the unemployment rate. On Friday of last week unemployment data for the month of July was released and, although 1.8 million jobs were added during the month, the unemployment rate is still above 10%.
But what does “unemployment” actually mean?
Colloquially unemployment just means exactly that - someone without a job, but the Bureau of Labor Statistics calculates it a little differently. The U-3 unemployment rate (which is the most common statistical measurement of unemployment) includes folks who are:
Available to work
Actively seeking work
Are furloughed
It does not include folks who are:
Employed in part-time jobs, but who want to work more
Underemployed
Work 15+ hours a week of unpaid “family work”
No longer seeking work because they haven’t been able to find work for a long time (these people are considered “out of the labor market”)
It also, unfortunately relies on answers from folks who may end up misclassifying themselves. For example, a freelancer unable to find work during the COVID-19 pandemic might not say they are “unemployed” and therefore wouldn’t be counted in the rate. However, they likely should be as they are not bringing in income.
There is a better indicator: the U-6 unemployment rate includes folks who are working part-time, but want to work full-time and folks who are “marginally attached to the labor force”. Being marginally attached includes people who have given up searching for a job.
So, while July’s U-3 unemployment rate was 10.2%, the U-6 rate was 16.5%. Not to be a negative Nancy, but I’m going to go ahead and say that the U-6 rate is much more accurate and is the metric we should actually be using when we’re talking about employment in the U.S. I mean, how are we supposed to successfully tackle the problem if we’re not even talking about the numbers accurately?
I talk about being financially transparent with yourself all the time and, while I am usually talking about personal or small business finances, I think that same advice goes for the government as well. One of my favorite templates I use with clients (that you can get for free here!) is the Know Your Numbers spreadsheet. The purpose of the template is for you to be able to see all of your key metrics in one place:
How much liquid (i.e. easily accessible) cash you have in checking and savings
How much illiquid (i.e. would have to sell to access) savings you have
How much debt you owe
How much your assets are worth
What your income is
What your credit score is
All of this information is valuable because it can help you see where you financially stand now and recognize areas that you’d like to change.
For example, when I look at my Know Your Numbers spreadsheet I feel proud of my lack of credit card debt and increasing savings, but know that I haven’t reached all of my savings or investing goals yet. Seeing that clearly helps me know what my next steps should be. On the other hand, if I have to open seven different tabs in order to get this information I’m likely going to be pretty confused and will not have an accurate read on my real numbers. I might end up thinking because I don’t have credit card debt that I don’t need to do anything else to improve my financial outlook. Or I might end up focusing in on just one account and miss the forest for the trees. Looking at the U-3 unemployment rate is very similar. It may look better than the U-6 rate, but it doesn’t tell the full story and therefore likely doesn’t point us in the right direction for how to make improvements.
XOXO
