Misclassification Errors of Unemployment Rate

Information verified correct on March 11th, 2021

On the first Friday of every month, the Bureau of Labor Statistics releases the most current unemployment numbers for the country, which are the number of unemployed divided by the number of people in the labor force. This is not to be confused with the weekly jobless claims number, which only considers the number of people who applied for unemployment insurance.

The latest weekly jobless claim number was 861000, an increase of 13000 from the previous week. We call the unemployment rate a sneaky statistic because we focus so much attention on that. And yet, it’s limited in terms of what it gives us. The latest numbers show that payrolls barely grew at the start of 2021, even as the unemployment rate fell to 6.3%.

In January 2021, the U.S. added 49000 jobs. Overall, over four million people have left the labor force because of the pandemic, and about 12 million of the more than 22 million jobs lost at the beginning of the coronavirus have been recovered. A February report from the Congressional Budget Office predicted rapid growth recovery in 2021 and the labor force returning to pre-pandemic levels by 2022 sooner than expected.

But some experts believe that the official numbers may not truly reflect darker parts of the labor market because it’s only telling you about actively available people and looking for work in the last four weeks. Labor Department’s latest report also shows that long-term unemployment is going up, leaving many families in a precarious situation.


This contrasts the rosy expectations that we see from some of the numbers. So is the unemployment rate wrong, and how can the US better understand the employment situation? Economists and traders were shocked after the unemployment rate unexpectedly dropped in May 2020 after shooting up in March and April due to the coronavirus pandemic. Employment rises by two and a half million. Payrolls rose by two and a half million. The unemployment rate declined to 13.3%. This is a huge gain.

Many were quick to point to problems with the data itself. This number caught just about everybody off guard. The Bureau of Labor Statistics, which is in charge of calculating the official unemployment figures in the U.S., has a history of misclassification errors. In the case of the May jobs report, the unemployment rate without the error would have been closer to 16.3%, a big difference from the reported 13.3%. The BLS has been trying to account for this in their subsequent reports. The latest report states that from March through December, BLS published an estimate of what the unemployment rate might have been having misclassified workers been included among the unemployed. That misclassification error has been cut down to about 0.6%.

They’ve done an excellent job of making adjustments actually to improve the accuracy since May. And it’s important to note that there’s always an undercount even before COVID because the places where they’re less likely to get responses are people who are unemployed. The discrepancy sheds light on a broader debate over whether the official unemployment rate, formally known as U3, is the best measure of joblessness in the U.S.

U3 is the total unemployed as a percent of the civilian labor force includes all jobless persons available to take a job and have actively sought work in the past four weeks. We really want our government to measure things, and we want to manage what we measure. But we think it’s good to look at the different types of data to try to get a complete picture.

When people look quit looking for work, the unemployment rate will fall, other things the same. And so, if we’re looking only at the unemployment rate, that would give us a message that labor market conditions are improving when in fact, they may not be. It would be tough to survey over 330 million Americans every month, so the Census Bureau surveys around 60000 households every month, or about 110000 individuals, through their current population survey.

The numbers are not based solely on those receiving unemployment benefits because that would not count people whose benefits have expired or those who haven’t applied for unemployment. It takes about 2700 field workers about 10 days to complete the survey. The official U3 number is in the middle of six unemployment rates еhat could broader the higher the numbers go. U1 are persons unemployed 15 weeks or longer as a percent of the civilian labor force. U2 are job losers and persons who completed temporary jobs.

U3 is the official unemployment rate. U4 is U3 plus discouraged workers, and discouraged workers were those not currently looking for work, specifically because they believed no jobs were available for them or there were none for which they would qualify. U5 is U4 plus all other marginally attached to workers who are not in the labor force who want and are available to work and have looked for a job sometime in the prior 12 months.

But were not counted as unemployed because they had not searched for work in the four weeks preceding the survey. U6 is U5 plus the total employed part-time for economic reasons. U3 tells us a lot about how well the labor market is clearing. For purposes of fiscal stimulus or monetary policy, you certainly want to understand who out there is looking for a job and saying they can’t find one.

It doesn’t make a lot of sense to say that many people aren’t looking for work and don’t have a job, which means there aren’t enough jobs. That’s not quite the right way to think about it. Some argue other metrics are a better gauge of the state of the labor market, like the labor force participation rate, which is the percentage of the civilian noninstitutional population, 16 years and older, that is working or actively looking for work.

That number has been declining for more than 20 years. As more baby boomers retire in January 2021, the labor force participation rate was 61.4%. These numbers show just one aspect of the whole situation. And the way unemployment works is different in every state. The average American unemployment check was 378 dollars at the end of 2019. The coronavirus package passed in December 2020 added 300 dollars in extra unemployment aid until March 14th.

The first stimulus package added a weekly unemployment check of 600 dollars and added an extra 13 weeks of eligibility. That boost unemployment a little bit at the start of this pandemic because people who might otherwise have tried to keep on working, even though somewhat dangerous working conditions, decided: look, I’ll take the six on the dollars extra for as long as I can get it. That was quite generous. There’s less of that going on right now.

Unemployment is funded by a previous employer through federal unemployment taxes. That goes into a giant fund designed to be a social safety net for workers who lose their jobs. The process can be complicated, but most companies must pay a 6% federal tax on the first 7000 dollars of every employee’s salary every year. After state tax breaks, the percentage sometimes drops below 1%. The amounts will vary depending on where you live.

Here’s a case study. We’ll assume someone in New York lost their job making 50000 dollars a year through no fault of their own. And they decided to file for unemployment benefits in March. To start the math, you’ll need to look at a calendar. The calculations are based on something called base periods. They divide your salary into four separate three-month blocks on a calendar. But simply, it’s the amount of money you earned every three months for the last year, not including the current block.

This is called your basic pay period. If you make 50000 dollars paid at a steady rate, you’ll bring home 12500 dollars every quarter. In New York, they take your highest wage quarter and divide it by 26. This gives you 480 dollars or half of your previous salary. This would usually be paid out for the next 26 weeks.

The next stimulus package, which is likely to pass Congress soon, will boost additional federal unemployment benefits to four hundred dollars a week until August 29th. The programs include extensions of the pandemic, unemployment assistance for self-employed and other workers who don’t qualify for state benefits, and pandemic emergency unemployment compensation for those who used up their standard allotment of state aid.

The access to additional benefits has left many workers unsure how or when they can collect extra unemployment benefits. President Biden had expressed a desire to avoid a benefits cliff-like after Christmas in 2020 when nearly three million people lost their unemployment insurance benefits. The 900 billion dollar stimulus package hadn’t passed in time to avoid the lapse.

Some argue that Biden’s stimulus may be too big amid economic recovery and should instead be targeted at those most impacted. President Biden hoped to secure bipartisan approval for his stimulus package, but Democrats in Congress are proceeding without Republican support.

The first state in the U.S. to offer unemployment insurance benefits was Wisconsin in 1932, at the height of the Great Depression. As the depression worsened, more states began considering benefits. But many were discouraged from enacting programs because states with UI benefits were at a competitive disadvantage with states with no laws.

That’s when the federal government stepped in. The federal unemployment insurance program was created in 1935 when President Roosevelt signed the Social Security Act, part of his New Deal, in response to the Great Depression. By 1937, all states and territories had enacted their own unemployment insurance laws. The current population survey, where unemployment data is pulled from, started in 1940.

Unemployment insurance wasn’t new. In the early 19th century, some trade unions started offering benefits to out-of-work members. But according to the Social Security Administration, less than 100000 union members were covered by unemployment benefit plans in 1934.

Labor unions have been instrumental in gaining benefits for their members. Union membership has been in decline since 1983 when 20% of those employed were union members. In 2020, that number was down to 10,8%.

What we’ve seen over time is the erosion of worker power s corporate power has been increasing, increasing, and with the ways, the law has changed to make it harder for workers to organize and join together collectively to bargain for wages and terms and conditions of employment, we see that the balance is lopsided.

And so for companies, if there’s no counterbalance, they’re just allowed to focus on their shareholders. But the coronavirus pandemic may be causing support for labor unions to rise after a Gallup poll found that 65% of people approve of unions, a figure not seen for more than 20 years.

Women have entered the workplace at record speed since the introduction of birth control in the 1970s. But a recent study from McKinsey and LeadIn.org shows that women, particularly women of color, have been laid off, furloughed, and are considering leaving the workplace as pressures of home and work mount due to the coronavirus potentially devastating the progress made.

We’ve seen with COVID because so many schools remain closed, which has affected labor force participation rates, particularly for women. They’re leaving the labor force because of these challenges around balancing work and family, which the US of the developed countries has sort of a behind-the-times approach to how do we balance work and family.

To adjust for that policy expectation, progressive advocates are fighting for a federal minimum wage of fifteen dollars an hour as an incentive to keep women in the workplace. A recent report from the Congressional Budget Office stated that a 15 dollar minimum wage would reduce employment by 1.4 million workers or 0.9%, but lift 900000 people out of poverty. But there are other reasons some believe a 15 dollar minimum wage would be beneficial to the economy as a whole. So not only will you have a better wage when you’re working, but if you’re in between jobs, you actually have a more robust safety net for you there.

Some jurisdictions like New York City and Seattle have worked up to a 15 dollar minimum wage. But some say it is not feasible at the federal level because there’s not a single state in the nation right now that has a fifteen dollars an hour wage. States can and do raise their own minimum wage, but more than 40 have their own minimum wage, and it’s oftentimes above the federal seven dollars and 25 cents. They can do it, states like California, West Virginia, or Illinois. And they’re not doing it because they don’t want to do it. It doesn’t fit their local needs.

It is yet to be seen how the unemployment landscape will shape up as the world reopens after COVID-19. But learning from the data can tell us how to better prepare for the next downturn.

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