John Hood: Digging down on the jobless rate

Published 12:30 am Monday, August 8, 2016

By John Hood

John Locke Foundation

RALEIGH — Is the full picture of our labor market captured in the official unemployment rate? The answer to that question is no — but that doesn’t mean there’s a conspiracy afoot.

In Washington, Republicans have long argued that the steady decline in America’s unemployment rate doesn’t mean what President Obama and his boosters say it means. Many American workers, discouraged or displaced from their traditional sources of employment, have simply given up looking for jobs, GOP critics say. Here in North Carolina, the roles have been reversed, with Democrats offering the same response whenever Gov. Pat McCrory touts the state’s declining unemployment rate.

These objections aren’t wrong. According to the standard definition, you are only counted as “unemployed” if you lack a job and are actively looking for one. If you stop looking — or you work part time but are still looking for full-time work — the standard rate doesn’t capture your reality.

As of June 2016, there were about 240,000 North Carolinians classified as unemployed according to the standard definition, known as the U-3 rate. But many more North Carolinians are discouraged, otherwise detached from the labor force (because they are relocating, retraining, or taking care of family members, for example), or underemployed (because they work parttime instead of their preferred full-time).

Fortunately, we don’t need to guess at how many there are in each category. The U.S. Bureau of Labor Statistics produces more than just the standard U-3 rate for all 50 states. Every quarter, BLS also releases broader measures of the labor market that include all the workers I just mentioned.

That’s what I mean when I say there’s no conspiracy here. The statisticians who produce unemployment data know the limitations as well as anyone. But they can’t produce the broader measures for every state every month.

Keep in mind that labor-market statistics come from representative surveys, just as pollsters try to gauge electoral trends by polling a small number of voters. In North Carolina, the sample size for the unemployment statistics is barely above 1,000. At that level, you just can’t make fine distinctions among different unemployment categories. The margin of error is too big. So when BLS issues its alternative labor-market measures, it uses an entire year’s worth of surveys, updated on a quarterly basis.

For the 12 months ending in June, then, the broadest measure of labor-market health — the U-6 rate — averaged 10.2 percent in North Carolina. That was nearly twice as large as the state’s standard unemployment rate for the same period. Roughly speaking, you can take the 240,000 officially counted as unemployed and add another 210,000 North Carolina workers who are either discouraged, detached, or underemployed.

The total of the two, 450,000, is a distressingly large estimate of underutilized workers and struggling households. It’s about 50,000 more than the number of North Carolinians who were unemployed or underemployed in 2006, before the onset of the Great Recession. But it’s not out of proportion with the rest of the country. In fact, the gap between North Carolina’s U-3 and U-6 rates is not appreciably different from the gap between America’s U-3 and U-6 rates.

Several years ago, that wasn’t true. In fact, from mid-2013 to mid-2016, North Carolina’s U-6 rate fell by 5.4 percentage points — the largest labor-market improvement in the Southeast, and the 8th-largest improvement in the nation.

Feel free to debate whether the policies of Gov. McCrory had anything to do with North Carolina’s dramatic labor-market gains over the past three years. The point here is that, for the country as a whole, using the standard unemployment rate understates the scope of the challenge facing workers in what is America’s slowest economic recovery in modern times (as measured by the annual growth rate).

We need more business starts and job creation. We need better education and training options. We need better-designed unemployment programs that assist workers to retrain or relocate more rapidly. Most of all, we need a better understanding of the problem. Using broader measures would be a good place to start.


John Locke Foundation chairman John Hood is the author of “Catalyst: Jim Martin and the Rise of North Carolina Republicans.”