Controversial New Study Questions the Validity of US Unemployment Rate

By | September 7, 2014 at 3:30 PM |

There is no US economic statistic that is quoted more than the US unemployment rate. The rate is not only perceived to be indicative of the country’s overall economic health, this single-digit number is also incredibly politically charged. Accuracy, then, is essential.

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However, coming up with an accurate unemployment rate is much easier said than done, and the unemployment calculation process is an arduous one. The rate is calculated by The Bureau of Labor Statistics (BLS), who averages the results from eight separate samples of the population, known as rotation groups. The BLS creates a new rotation group each month by drawing a random sample of people from the U.S. population for the Current Population Survey (CPS). A rotation group is included in the calculation of the unemployment rate for four months, then left out of it for eight months, and then brought back in for four months before being dropped permanently from the calculation.

“The report tries to estimate employment in a big country – and to do so quickly, to give policy makers, business executives and everyone else a sense of how the economy is performing,” David Leonhardt explains in the New York Times. “It’s a tough task.”

Indeed it is a tough task, one made all the more tougher by Americans general unwillingness to respond to unemployment surveys, a new academic paper claims. The paper, cleverly titled “The Evolution of Rotation Group Basis: Will the Real Unemployment Rate Please Stand-Up,” suggests that rotation basis in the Current Population Survey, what paper’s authors define as “the tendency for labor force statistics to vary systematically by month in sample in labor force surveys” has worsened considerably over time, calling into question the accuracy of the unemployment rate.

“In the first half of 2014, the newest rotation groups had an unemployment rate of 7.5 percent,” Leonhardt explains. “The oldest rotation groups had an unemployment rate of just 6.1 percent.” A difference of 1.4 percentage points might not seem all too significant— but it is. Economists take note when the rate drops a mere tenth of a percentage point, so a difference of 1.4 points is enough to turn heads.

What is causing these increasing rates of rotation basis? The paper attributes the phenomena to nonresponse, an issue currently looming large in the social sciences. It would seem that people are less and less wiling to response to surveys. According to Pew, in 1997 the response rate to a typical telephone poll was over one-third—close to 36 percent. However in 2012, it had fallen to a mere 9 percent.

In the case of unemployment, the paper’s authors attribute the marked decline is the willingness to respond to a plethora of different factors, including the decline of landlines and the rise of caller ID (people are much less likely to answer the phone if they don’t know who is calling). The authors also cite Americans’ declining level of trust in institutions—the government, the media, churches, banks, labor unions and schools—has a major factor.

“People are skeptical – Is this a real survey? What they are asking me?” explains Francis Horvath of the Labor Department.

The paper also contends that over time the time of people that respond to the survey, and the types of answers that they give, change. In the latter portions of the survey those without a job are much less likely report being available to work and much less likely to report having looked for a job in the past four week, which constitutes the BLS definition of unemployment. These individuals then, though still without a job, aren’t included in the unemployment rate, skewing the results. ”Respondents who were interviewed several times became less likely to report actively looking for a job, even if they were on a new jobless spell,” the paper explains. The employment rate is subsequently higher for new rotation groups than it is for older ones.

“It is possible that unemployed respondents who have already been interviewed are more likely to change their responses to the labor force question, for example if they want to minimize the length of the interview (now that they know the interview questions) or because they don’t want to admit that they are still unemployed,” the paper contends.

Of course, the obvious question is, what is the real unemployment rate? Well, nobody really knows. And it is pretty much impossible to discern. All in all, the paper contends that the employment rate deservers much less attention than it receives. In other words, the nation’s fixation on this single number is both unhealthy and unproductive.

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