What's The Real Unemployment Rate? That's The Wrong Question

Tyler Durden's picture

Submitted by Charles Hugh-Smith via OfTwoMinds blog,

Numbers like gross domestic product (GDP) and the unemployment rate no longer provide insight into how our economy works.

As the status quo narratives and metrics lose their explanatory value, defenders of the status quo frantically leap into attack mode, declaring any skeptical inquiry as a "conspiracy" or "hoax." A recent example can be found in that high-brow defender of the privileged status quo, The New Yorker.

(We can identify a new socio-pathological syndrome called The New Yorker Syndrome: if all is right on the Upper West Side, all is right with the world. In other words: since me and my top 2% pals are doing great, everything's going great.)

The New Yorker writer defended the way the unemployment rate is calculated by saying "we've got top people on this--top people:" we should accept the official metrics as meaningful because they're the work of PhD economists-- you know, "top people" who are far above peasants' non-expert skepticism.

The only problem with this "top people" defense is it is increasingly clear that the economic models that PhD economists claim are working well are in fact failing. They are failing for a number of reasons I list in my book Why Our Status Quo Failed and Is Beyond Reform, one of which is: the current metrics are answering the wrong questions, and as a result they've lost their explanatory and predictive value.

Since we optimize what we measure, the "top people" are trying to optimize increasingly meaningless metrics--GDP, unemployment, etc. The only possible output of optimizing meaningless metrics is economic stagnation and failure: precisely what the real-world economy is experiencing.

Numbers like gross domestic product (GDP) and the unemployment rate no longer provide insight into how our economy is changing. The Keynesian Cargo Cult's insistence that "aggregate demand" is the key to "growth" and widespread prosperity, and that "aggregate demand" is a function of monetary policy, no longer tracks the real-world economy.

All that might have been true in 1933, but it no longer maps to the real economy, in which increasingly extreme Keynesian monetary and fiscal policies have done nothing but widen income and wealth inequality.

The unemployment rate is nothing but guesswork hocus-pocus. The current system has the Bureau of Labor Statistics (BLS) and other agencies guessing how many people in the workforce are "discouraged" and should be deleted from the workforce count.

Then they guess how many new businesses started up and how many closed (the birth/death model) and how many people might have been hired/let go as a result of the birth/death model guesswork.

They derive data by collecting self-reported statistics--the most unreliable source of data possible, as people will adjust their answers to avoid reporting whatever looks bad and exaggerating what looks good. Even if they are scrupulous, does collecting time sheets really provide insight into the economy, employment, and labor force utilization?

Why are we defending hocus-pocus guesswork, when the IRS has hard data on employment, wages, income and the small businesses that are paying estimated taxes for their employees and owners? This data is extracted confidentially-- the taxpayers' identities remain private.

Click on the 2014 link in All Returns: Sources of Income, Adjustments Deductions and Exemptions, and Tax Items: Individual Income Tax Returns Filed and Sources of Income (this is the latest publicly available data)

The reports can be downloaded and opened in Excel. There is a treasure trove of data on wages and other income sources. These report tell us precisely how many workers are in each income bracket.

Self-employed workers and employers know that estimated taxes are due every quarter for all but the smallest sole proprietorships. (Larger firms must make weekly estimated tax payments, which include the taxes withheld from employees' paychecks.)

This means the IRS has an extremely accurate snapshot of employment, wages, income and small business every quarter. Rather than issue monthly guesses that are easily politicized, why don't we just make public the IRS quarterly data? If the IRS needs more staff to make this happen, we could transfer staff from the BLS to the IRS.

Asking "how many people have some earned income?" to calculate the unemployment rate is the wrong question. What we should be asking is, how many workers consistently earn sufficient income to support an independent household, i.e. they have "breadwinner" jobs.

Claiming that an earned income of a few thousand dollars a year is functionally equivalent to a fulltime job with paid benefits makes no sense. Lumping every "job" (i.e. earned income) into one category tells us essentially nothing of value about the economy or the labor market.

The IRS data allows us to break out earned income and see how many workers earn sufficient income to support an independent household, i.e. they have "breadwinner" jobs. If we're interested in expanding broad-based prosperity, this is the number that matters.

A low unemployment rate tells us essentially nothing about labor, wages, employment or the real-world economy. What is meaningful is how much earned and unearned income is flowing to the various income brackets, and how many people have incomes that enable an independent household.

From this data, we know that about 123 million tax returns (individuals, married filing jointly, etc.) reported earned wages and salaries in 2014. 35.5 million returns reported earnings of less than $20,000. (Other data fields include the number of returns by type.)

As for calculating the size of the nation's work force: we can use U.S. Census Bureau estimates of the population ages 16-70 (now that more people are working past the age of 65), then deduct the disabled and those in institutions. The remaining number is the work force. There is no value in guessing who is "discouraged" and who isn't.

There is no policy need for guesswork numbers issued monthly when an accurate account of wages, salaries, unearned income and employment is available quarterly. Since estimated taxes are due around mid-month in January, April, June and September, the IRS could collate the data by the end of the month. There is no guesswork in these numbers; the data includes every employee, employer, self-employed person, gig economy worker, retiree getting a pension, etc. in the economy.

The only part of the economy that is not included is the black-market/cash economy that doesn't report income to the IRS. Measuring this will remain a challenge because those self-reporting black-market income are admitting to breaking the law.

The truth is the unemployment rate is a political number, not an economic one. If we want an accurate snapshot of employment, earned income and the state of small business, we have hard data that is already collected quarterly. Common sense suggests we will get more value from hard data than from politicized guesswork.

*  * *

My new book is #7 on Kindle short reads -> politics and social science: Why Our Status Quo Failed and Is Beyond Reform ($3.95 Kindle ebook, $8.95 print edition) For more, please visit the book's website.

 

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VinceFostersGhost's picture

 

We're not going to sit here......and watch you badmouth the United States of America!

 

https://www.youtube.com/watch?v=38ETQ1RYa_Q

MillionDollarBonus_'s picture

This method is flawed as it doesn't take into account the number of people who are out of the workforce, such as retirees, students, hobbyists, and people who choose to live on welfare (which is a perfectly respectable lifestyle choice). This method is always going to yield a larger unemployment figure than conventional methods, which I suppose makes it perfect for doomer ZHers.

WHY PAPER GOLD IS JUST AS GOOD AS PHYISCAL GOLD

 

JRobby's picture

You must have something else to do with people that agree with your "philosophy" ????

I think you are smart enough to know what the psychology behind what you do is.

El Vaquero's picture

Mainstream economists never saw 2008 coming.  After it hit, they failed to adjust their models to reflect reality.  They claim that their field is a scientific one, yet they flat out fail to follow the scientific method.  They are pseudo scientists trying to justify the largest Ponzi in human history. 

JRobby's picture

Mainstream economists are the product of Fed / Globalist Stocked Academia and can not be acknowledged at all period. 

Pairadimes's picture

Looking at the IRS data will only inspire panic among the masses. Not only is average household income at the bubble peaks declining, but it is declining in real terms as well, especially if actual, not reported inflation is taken into account. Alas, the statists cannot hide a sunrise, and the truth will eventually make its way into the conciousness of even the most dimwitted of the ignorant flock. Hedge accordingly.

Sandmann's picture

They weren't paid to notice Wall Street blowing up........cross their palms with silver and they might

Killdo's picture

I agree I have a degree in economics and it was a waste of time (it took me a decade or so to forget all the Friedman BS they taught us). I spoke to several friends with degrees in Economics from LSE and other top universities and we all agreed we did not learn anything useful - it was a total waste of time and money - Economics is a fake BS science.

it's really like  religion - they message is to ignore reality  and to embrace fraud, BS and lies instead.

And because 'it's not about straightforward common sense (reality)'  you need  'priests' (i.e. economists) to tell you the secrets of 'knowledge' ....

You are as likely to achieve sustaniable economy by following the advice of Bernanke and other assholes as you are to live AFTER you die (following advice of priests and other mafia)

Angry White Guy's picture

Economics as it is defined in a dictionary isn't useless.  The useless versions are what you and your friends paid money to be taught.

DavidC's picture

Steve Keen might be the exception to that though.

When GDP includes illegal drugs, prostitution, research and development, hedonically adjusted inputs and Government Spending one knows it's a completely ridiculous way of measuring things.

DavidC

Duane Norman's picture

His analysis looks pretty good to me.  Don't hate the player hate the game

CJgipper's picture

That breadwinner chart would be more informative if it was population adjusted or notmalized (total population or adults working age including institutionalized and disabled because many get into drugs in destroyed economies).  The "recovery" after 2008 would have remained flat.

Mark Urbo's picture

Here is the basic effing problem with that type of thinking which seems to permeate on business channels and in academia.

Large percentages of retirees, students, hobbists (?), and even many on welfare would like to something to do (i.e., work...) and be a part of the workforce at many levels (contributing at a small level on through full and REAL employment) if the jobs were there...

 

..but they are NOT.  The leftist policies have this country so effed up, its hard to see how to fix it.

Eagle40's picture

Another retarded comment by the Million Dollar Moron. As a journalist did you ever take a business course in college? Most progressive liberal left wing loons such as yourself seem to have difficulty comprehending logical thinking skills. I know many that are unemployed with masters degrees and not collecting unemployment benefits looking for work only to be turned down because of being over qualified or quite frankly older. Many have just dropped out working part time at Home Depot while their spouses work full time. Lucky their spouses have a decent job. You and all the Marxist left wing nut jobs are the reason the US and world is in a state of socioeconomic collapse due to progressive Keynesian nonsense and central bank chaos. Oh, I would recommend you quit copying the ideas of conservative wed sites onto your ridiculous site but then again liberals are not creative innovators but only manipulating lazy fools like you. TO ALL ZERO HEDGERS PLEASE DO NOT GO ON THIS FOOLS SITE BECAUSE IT IS GARBAGE. I WAS ON THIS ONE TIME AND IT IS NOTHING MORE THAN A MARXIST PROPANGANDA TOOL.

Dick Buttkiss's picture

E40, MDB is 100% deadpan sarcasm. Think Colbert Report, and you'll start laughing accordingly.

sgt_doom's picture

The New Yorker writer defended the way the unemployment rate is calculated by saying "we've got top people on this--top people:"

Aaaaaaahhhhhh, you mean like NBER emeritus, Martin Feldstein of Harvard? 

Who was a director at HCA when it paid the then largest out-of-court penalty settlement for Medicare/Medicaid fraud?

Who was a director at Eli Lilly when it was hit with the largest penalty in US history?

Who was a director at AIG's Financial Products group when it sold $460 billion worth of CDSes, and had to be bailed out by the gov't so it didn't destroy Chase, Goldman Sachs and Morgan Stanley?

Just asking . . . .

JRobby's picture

22% earnings are down. Demand is down.

SomethingSomethingDarkSide's picture

We are re-living the 1920's.  Prepare for The Ghost of 1937.

Sandmann's picture

1937 Japanese sank USS Panay in China and FDR backed down

Nunya Bidness Gogl's picture

Yeah well, I don't see our sociopath oligarchs backing down from anything just about now. In fact, they are promoting and inciting war all over the world presently.

RockySpears's picture

Things were better then.  At least after 7 years wages were only 4% lower, from 2007-2014 they were 8.2% lower:

https://www.ifs.org.uk/uploads/Presentations/Understanding%20the%20reces...

 

 In Real terms (after inflation etc) and taking the fact that there was 2% growth on average in the years preceding 2007, the wages of UK workers are 20% lower than at the time of the Grand Collapse of 2008/9

20% lower wages!

  and they wonder at things like Trump and Brexit,

 

RS

ThirteenthFloor's picture

Who's working ? Actually nothing is working.

VinceFostersGhost's picture

 

 

Not over 29.5 hr/wk.....it's the freakin law!

JRobby's picture

At half of what you used to earn

SillySalesmanQuestion's picture

...and forced Obamacare extortion payments.

Mini-Me's picture

...using a constantly depreciating currency.

RAT005's picture

You don't have to pay the fine.  IRS is annoying but just ignore them.  They can do nothing about ObamaScare fines.

JRobby's picture

Eating up people's refunds. Adjust your withholding allowances accordingly. Refunds are a bad strategy anyway.

A Nanny Moose's picture

IRS is forcing people to adjust their W/H so that they overpay. I just had them do it to me. Sent a letter to my office, saying exemptions were too high for my filing status.

Gummint likes the interest free loans.

asteroids's picture

Any adult with a modicum on intelligence can tell you that Economics really isn't a "science", like Physics or Chemistry. It's pretty close to Astrology in my mind. Don't Ben and Janet look like astrologers to you?

Sandmann's picture

Economics is a branch of Moral Philosophy - at least that is where Adam Smith and J S Mill had it.  It was simply the Mathematicians like Keynes who wanted it to be something else, and the fear of Marxism as a "science"  [Marx dedicated Das Kapital to Charles Darwin and his pseudo-scientific theory]  made Capitalist Economists look for Determinism and Planning

NoPension's picture

I'm 53. By any measure or standard, I'm unemployed and totally removed from the workforce. To the extant possible, I don't exist. I am busier, and more in demand then at any time in my life. If things go awry, I go on the dole. I'm not explaining. Opsec. Fuck em.

CRM114's picture

I am also 53, etc.

I am also the best anyone has ever seen at every job I've ever done (bar one). These days, no big employer wants to give me a job. I'm too clever and too honest. Every potential boss takes one look at my resume and sees me as a threat; so does HR. I can fix their problems, but they don't want that. Firstly, it would mean admitting they have problems. Secondly, it would imply they couldn't fix them themselves. Dangerous.

The only thing that matters is that they deteriorate slightly more slowly than their other big competitors, and that they get Government to shut out start-up competitors with regulation and bureaucracy. If you're half blind, stab everybody else's eyes out.

This is why productivity is dropping through the floor. Nobody wants excellent; they want competent, compliant and easily controllable.

A Nanny Moose's picture

This is what happens when; there are more MBA's and Lawyers, than engineers; Education strives toward egalitarian utopia, rather than teaching hard subjects, and flunking out the chaff.

Corporate USA is all about figuring out who can be thrown under the bus, rather than solving the problems.

I am doing InfoSec work at a hospital right now. It is a complete disaster. Information is inaccurate and incomplete. Data identification and classification are foreign languages to these people. No wonder Hillary is getting away with murder.

 

 

pitz's picture

Very true.   Outsourcing drives a lot of demand for the lower-end of the skills pool, as the outsourcers generally charge "by the hour", and want the work to take as long as possible so they can collect the most commission.  The contemporary result, at least in the university programs I'm familiar with, is that the bottom half of the class actually is able to find jobs because they're willing to work for cheap (ie: they didn't do well in college so they don't perceive their value to be high!).  Its the top half, particularly the top quartile and decile, that suffers the most unemployment trouble as firms don't want to pay for their skills, and they have an awfully hard time marketing themselves to lower-end employers who are simply not in need of the higher-end skills. 

 

 

CRM114's picture

Agreed. I've lectured at Uni recently. What they call "Leadership" is now box-ticking of management process forms. I wouldn't trust any of them to run a bath. Kids haven't changed; the basic potential is still there in some, but stick your head above the parapet of the marking taxonomy and you will get it shot off.

At the beginning of one's working life, this has always been true. Start as the 'gray man', just good enough to make the grade (whatever that is), because then one can show improvement. 

The problem is later on when they ought to be recruiting for proven ability, and claim they are, but clearly aren't.

Shizzmoney's picture

People are working....it's just their jobs are fragmented and fragile.  The economy only works for around 20% of people (and there are some within that 20% who are one shock away from having a hard time because those high earners are usually over leveraged with college, car, and mortgage debt).

There are no guarantees that folks can wake up without some shock, like getting axed on any random day for any random reason.  Also, benefits are non-existent and while insurance coverage is up, so are premiums and deductables and the decline of the amount of stuff the insurer covers under these "plans".  They also don't get raises, and if they do, it's only at around an average of 2.5%...which barely covers "official" inflation, nevermind the actual (hyper)inflation of rents, health care, and food.

While it’s good that part-time workers are making more money, they’re still not making a living wage. A workforce that has to cobble together two or three jobs to make ends meet, or one job that doesn't provide PTO and insurance —the 1099 economy— is not exactly one living the American dream, even if their income "rises" in one year.

The economy is fragile, and the fact that the government refuses to admit it is a scary thing, IMO.

 

JRobby's picture

IRS seems to be doing well in the 1099 economy since the average person thinks tax planning is for the wealthy.

The 3 job economy along with obamacare fraud are taking its toll on healthcare and it's very visible but undiscussed.

Break_the_Bank's picture

In the new math of unemployment calculation,  a single person losing a job and taking on two part time jobs to make ends meet now cuts the unemployment calculation by  one. Two 20 hour part time jobs is counted twice. Political manipulation to keep the ignorant believing the unemployment numbers are great for the purpose of making the administration look good. 

Shizzmoney's picture

A rehypothecation of jobs, if you will.

Thanks Jon Corzine!

RaceToTheBottom's picture

The goal of turning the US into a third world country is hard.

There are winners and losers.

Welcome to your new role.

 

If you don't like the role, change the game.

man of Wool's picture

The problem in America is that the top 8000 civil servants are political appointees by the President.  No wonder no one knows what the unemployment rate is.

JRobby's picture

Fire all 8000 immediately 

Sandmann's picture

Doesn't matter what the rate is but if large numbers of healthy young people spend over a year without work they stop looking. If a society wants to function it needs to keep most of its healthy people working and not discouraged.

If politicians are prosperous life is not very good for the voters.

If bankers are happy it is not a good sign for the workers

If newspapers peddle economic optimism yet cannot fund themselves through advertisers we know they are lying

Things that go bump's picture

And yet they keep on publishing those rags nobody buys. How is that possible? 

buzzkillb's picture

Cheaper than bubble wrap?

All of my successful clients run their own small business. Most of them seem pretty happy too. Maybe that's too much work?

orez65's picture

Employment Rate: Take the number of people who file W-2 Forms and divide by the number of people in the United States.

 

moneybots's picture

"A low unemployment rate tells us essentially nothing about labor, wages, employment or the real-world economy."

 

Not when it is politically rigged.