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

September 14, 2016

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.

NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.

Discover why I’m looking to retire in a SE Asia luxury resort for $1,200/month.