Saturday, June 27, 2009

Saturday Quiz: Why Is the Headline Unemployment Rate Bogus?

As monthly unemployment numbers drop, it's important to recall that the headline unemployment rate is entirely bogus. Here's why.

As the stock market awaits next week's unemployment numbers with barely repressed excitement--for a lower weekly unemployment data point would boost the "green shoots" propaganda campaign greatly--it's a good time to answer this question: Why Is the Headline Unemployment Rate Bogus?

1. The "Continuing claims" headline number is inherently flawed. While the unemployment rate is calculated in a number of ways (the so-called household survey methodology, etc.), the "headline numbers" which the MSMedia highlights are "continuing claims" (that is, the number of outstanding unemployment insurance claims) and "new claims" (the number of newly laid-off workers who filed for unemployment insurance).

All these different methodologies offer multiple opportunities for statistical trickery and spin. Various pundits and academics argue the statistical estimates are "valid," but their arguments are akin to the ancient debates over "how many angels can dance on the head of a pin"?

Here is the relevant description from the horse's mouth, the BLS (Bureau of Labor Statistics):

Differences Between Data Series:

Figures on unemployment insurance claims, prepared by the Employment and Training Administration of the U.S. Department of Labor, exclude, in addition to otherwise eligible persons who do not file claims for benefits,persons who have exhausted their benefit rights, persons who have been disqualified from receiving benefits, new workers who have not earned rights to unemployment insurance, and persons losing jobs not covered by unemployment insurance systems (some workers in agriculture, domestic services, and religious organizations, and self employed and unpaid family workers).

In addition, the qualifications for receiving unemployment compensation differ from the definition of unemployment used in the household survey. For example, persons with a job but not at work and persons working only a few hours during the week are sometimes eligible for unemployment compensation, but are classified as employed rather than unemployed in the household survey.

Among all the gobbledigook we find the truth: once a worker's unemployment insurance benefits expire, that worker is dropped from the count. Yes, the unemployed worker may be counted in the household survey as "discouraged," but he or she might well end up being counted as "employed" because he or she was briefly called back for a few hours of work a week or took an 8-hour a week temp job.

Thus the reality is that long-term structural unemployment is completely masked by the bogus "headline unemployment" numbers. The basic distortion is simple: all these measures of unemployment assume data gathered in "normal times" can be extended into deep, prolonged recessions.

Consider this quote: Low unemployment rate hides rise in long-term jobless:

More than "80 percent of the people looking for a job will find a job in 26 weeks. That is what all the statistics show," said Commerce Secretary Carlos Gutierrez in a recent interview.

In other words, because in good times 80% of the unemployed find new jobs within 26 weeks, we drop everyone from the count after 26 weeks, even in a recession. Now that many states have extended unemployment benefits to 39 weeks, then workers remain in the system an additional 13 weeks. But after 39 weeks, then the long-term unemployed disappear from the count.

As a result, what the "green shoots" propaganda campaign will tout as plummeting unemployment will be in fact only the disappearance of those unemployed being counted in the "headline numbers."

2. The birth/death adjustment similarly extends "good times" trends into deep recession. The headline unemployment numbers get "adjusted" by the so-called birth/death model, which proports to calculate the births and deaths of businesses as a metric of job creation and loss.

Here is the explanation (re-read if you want to take a nap): Net Birth/Death Model (Bureau of Labor Statistics):

Earlier research indicated that while both the business birth and death portions of total employment are generally significant, the net contribution is relatively small and stable. To account for this net birth/death portion of total employment, BLS uses an estimation procedure with two components: the first component excludes employment losses from business deaths from sample-based estimation in order to offset the missing employment gains from business births. This is incorporated into the sample-based estimate procedure by simply not reflecting sample units going out of business, but imputing to them the same trend as the other firms in the sample. This step accounts for most of the net birth/death employment.

Uh, gotcha. The first line reveals the model's fatal flaw: take research conducted during an unprecedented 26-year period of prosperity, and then extend that "research" into a prolonged recession/depression. Is there any wonder this absurd model generates 200,000+ "new jobs" a month, including tens of thousands in industries which we all know are being gutted, like construction and finance?

The distortions and absurdities go unquestioned because the Status Quo is desperate to maintain the illusion that the U.S. economy is "fundamentally healthy" (false) and that a "green shoots" recovery is underway (also false).Frequent contributor U. Doran sent in this link to data which can't be spun or finessed: tax revenues. Yes, they're plummeting: Tax Revenues Tanking.

In 2007 and 2008, government tax revenues averaged about $633.15 billion per quarter.

For the first quarter of 2009, however, the numbers just in tell us that tax receipts totaled only about $442.39 billion — a decline of 30%.

Looking to confirm the trend, we compared the data for April – the big kahuna of tax collection months – to the 2007-2008 average, and found that individual income taxes this year were down more than 40%. The situation is even worse for corporate income taxes, which were down a stunning 67%!

When you add in all revenue from all sources (including Social Security revenue, government fees, etc.), the fiscal year-to-date – October through April – revenue shortfall comes to 19%, vs. the 14.6% projected in Obama’s budget. If, however, the accelerating shortfall apparent year-to-date, and in April in particular, continues, the spread between projected and actual tax receipts will widen considerably.

Tellingly, for the first time since 1983, the U.S. government posted a deficit in April. That’s a big swing in the wrong direction, as the bump in personal tax collections in April historically results in a big surplus — on average about $68 billion.

Thought the "green shoots" propaganda campaign will try most desperately to put a positive spin on the "headline unemployment numbers," tax receipts tell the real story: nobody's making money and nobody's hiring, they're still firing in a frantic effort to keep from going under.

Except Wal-Mart. So everything's ducky.

Thank you, Tom F. ($25), for your most generous contribution to this site. I am greatly honored by your support and readership.

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