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Thursday, August 14, 2008

What's the Underemployment Rate?

The Gay Secretary

Similar to all other economic indicators, employment data has been altered by the government and its affiliated economic organizations for over three decades. I argue that this has occurred to distort the realities of America 's not-so “great” economic picture. For instance, when the Labor Department measures unemployment data, it only counts those who have searched for jobs within the past four weeks. Previously under President Lyndon Johnson this cut off was six weeks but was lowered to make the numbers look better. As well, the government makes no distinctions between part-time workers who want full-time work but cannot find it; they're considered “employed” which is assumed to mean fully employed.


A much better measure of employment is to look at the underemployment rate , which is always much higher. While this data is available, you'll never hear about it from Washington because it demonstrates America 's declining job quality and competitiveness. Consider what would happen to consumer confidence if the real data was reported. Government employment figures also count workers employed in what are known as “non-standard jobs” with no distinctions. Typically, these jobs include temp workers, independent contractors, part-time workers and the self-employed. The main problem with counting these individuals as “employed” is that non-standard jobs rarely include critical employee benefits such as healthcare or retirement plans . And because America 's labor force depends upon a large percentage of employee benefits for total compensation (up to 42 percent of the median wage earners total compensation), a proper analysis of employment trends must consider non-standard employment data. However, this data is not included. Non-standard jobs are also much less secure than traditional jobs. Therefore they don't provide the assurance and benefits of a stable career, making it difficult for these workers to plan for the future. Consequently, the rapid growth of the non-standard employment labor market over the past two decades has added to the growing job insecurity within the traditional workplace.

In addition, employment data does not indicate how long workers have been with a particular employer. But this information is also a very important component towards understanding the financial security of workers. Because so many consumer costs are now annuitized in the form of financing agreements, contracts or mandatory fees (mortgages, auto loans, auto and health insurance, mobile phone contracts, cable, credit card payments, etc.), consumers are becoming increasingly dependent upon having a steady and reliable source of income to meet these committed future expenses. Yet, the average American worker has never seen a greater amount of job insecurity.

Even before the last recession (now in dispute as of 2004, See Part 2), estimates show that over 25 percent of America 's workforce was engaged in non-standard employment. There's little doubt that this percentage is significantly higher today due to the competitive effects of the free trade. Therefore, employment numbers, as reported by the government provide a false picture because they don't account for diminishing wages and total compensation.

The Birth/Death Fudge Factor

The BLS also uses a birth/death model which is thought to account for new jobs created by small businesses and jobs lost by companies facing problems – something typically not reported in the Establishment Survey. The problem with this adjustment is that it is based on past performance and contributes more to employment growth when the economy is contracting, while contributing less when it is expanding. As a result, the employment picture will look much better when Washington needs it most – during a recession. Perhaps this is why it has taken so long for mortgage, banking, and construction jobs to decline despite the fact that many of these jobs were lost in late 2007. This model has added an estimated 3 million jobs since 2006. I find it interesting that the model received significant changes during the Internet meltdown. Even more interesting, the BLS hides the assumptions of this model from the public eye.

When Illusion Meets Reality

Washington continuously comes up with new definitions and assumptions to fit its grand illusion of economic growth. But the real data speaks for itself. If you look at the real inflation rate, real employment data, wage growth, the debt and trade deficit levels, and the weakness of the dollar, it's clear that the illusion is being unmasked right before your very eyes.

In reality the current unemployment rate is likely to be above 8%, while the underemployed rate is much higher – perhaps 25%. As America slips deeper into economic reality, you aren't going to see a peak unemployment rate of 33% as we did during the Great Depression, just like we aren't going to see the banks close their doors. But that does not mean the effects won't be equally devastating. Rather than 33% unemployment, we are likely to see 12% unemployment in the coming years, and 40 or even 50% underemployment. But Washington will hide the data as much as it can by introducing new tricks and playing new games. And while the FDIC insures bank accounts up to $100,000, the real question won't be whether you'll be able to withdrawal your money, but what it will buy.

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