As I stared at my computer assessing the gyrations of the financial markets, my phone rang. It was Samantha, one of my students at Texas Lutheran.
Samantha had been watching the financial news and said she was confused about a statement that Federal Reserve Chairman Ben Bernanke had made earlier that day.
She said “Why would Bernanke say that an unemployment rate of 7.6% OVERSTATES the health of the economy? That unemployment rate doesn’t exactly sound great.”
I was a bit shocked—not at the phone call, but rather at the fact that she had her brain engaged actually thinking about things during the middle of the summer. My mind drifted thinking about how much better my students are than I was when I graced TLU’s campus as a student. As my mind finished wandering down memory lane and the great times we had in college, I focused back on Samantha’s question.
Sam recognized that she was not an economic expert—but the statement sounded odd.
I asked her if she knew the definition of unemployment. There was a bit of silence on the phone as Sam assessed if I was asking a trick question.
Sam said I assume that someone who does not have a job is unemployed—aren’t they?
This was partially true. With Sam sitting in front of her computer I asked her to go to the Shadow Stats website—a database for tracking all sorts of economic data. The website loaded with the first page plainly displaying a chart with the “stated” unemployment rate. It also showed an alternative version of the unemployment rate of more than 23%.
Samantha exclaimed that this was quite a difference between the two figures.
As she made the remark I asked her what other categories of people are not included in the “official” unemployment calculation. She knew that as a college student she was not included and would not be considered unemployed until she had been out of college for at least two years.
I also reminded her that people whose unemployment benefits have run out still don’t have a job—but they are no longer counted as officially unemployed.
Furthermore, as people get frustrated in a job search many times they quit looking. Once they quit looking for work, they still don’t have a job—but they don’t factor into the official unemployment rate.
Additionally, people that are under-employed—like someone who is educated as an engineer but can only find work at a sacker at a grocery store, are not unemployed. This is also true of people who can only find part time work.
I could hear a sense of exasperation in Samantha’s voice as she recognized what a flawed figure this was. However, I was proud of the fact that she didn’t just throw up her hands and walk away. Instead, she became determined to see who was truly working.
This led us to the Department of Labor’s Labor Participation Rate. The participation rate, converse to the unemployment rate, measures those who are age 16 or older who are working in some capacity. As Samantha analyzed the data she made a startling observation. The participation rate had fallen steadily since 2008 and now stood at the same level it was at in the late 70’s.
As Samantha saw this she realized two things. First, it was no wonder that Bernanke said the 7.6% unemployment rate overstated the health of the economy—it excluded so many people it was not a very reliable figure. Secondly, the participation rate showed her that although the stock market has recovered to record levels—a lot of people are still out of work.
Dave Sather is a Victoria Certified Financial Planner™ and owner of Sather Financial Group. His column, Money Matters, publishes every other Wednesday.
Originally published July 16, 2013 at 8:27 p.m., updated July 16, 2013 at 8:27 p.m. Victoria Advocate