5 Ways Headline Unemployment Hides How Bad It Really Is
In November, the headline unemployment rate in the United States fell 0.3 percentage points to 7.0 percent, the lowest rate in five years. Total non-farm payroll employment rose by 203,000, and the total number of unemployed persons declined to 10.9 million.
The news, at a glance, was great. After years of underwhelming economic growth, it appeared as if the labor market was finally getting ready to leave the hospital. The U.S. Federal Reserve, playing doctor, announced in December that it would begin tapering asset purchases in January, effectively lowering the economy’s prescription of stimulants and signalling faith in the recovery. Fed policymakers have projected that headline unemployment will close out 2014 between 6.3 and 6.6 percent, a more optimistic outlook than was offered in September.
But labor market data is opaque, and the headline unemployment figure masks important characteristics such as marginally attached or discouraged workers. The headline rate is also sensitive to changes in the labor force participation rate, which, if it falls, can bring down unemployment without any jobs actually being created. Let’s take a look at a couple of ways in which labor market data can be misleading.