Employment Reality Lies Between Poles

In other words, unemployment is not low because the numerator is going up, but rather because the denominator is going down.

The argument the economists are making is that unemployment is actually dramatically understated, due to this mathematical sleight of hand. Depending upon whose assumptions you use, the actual unemployment rate may be one percentage point to four percentage points higher.

"If the participation rate was at the older, higher level [67.3%] , then the unemployment rate would be around 7.2%," ISI Group's Tom Gallagher was recently quoted in The Wall Street Journal. "Even using a 10-year average of participation rate yields a 6.4% unemployment rate."

Using the Fed's measure of Augmented Unemployment Rate -- (job-wanters + unemployed) / (labor force + job-wanters) -- sends that number up toward 8.4%.

And if those numbers sound bad, consider what happens when we add the "so-called marginally attached workers and part-timers who really want to be working full time," as Barron's recently quoted the Liscio Report. Counting these marginally attached and part-timers would send the unemployment rate to a formidable 9.4%. Using history as a guide, Liscio reckons "we're now 9.3 million jobs below where we'd be in a 'normal' recovery," the weekly reported.

It's Different This Time Job growth since 2001 lags other recovery periods

Source: Cleveland Fed, Establishment Survey

The shrinking labor force is why we have been enjoying a "deceptively modest unemployment rate." In a post-bubble environment, job creation is an ongoing structural problem.

Further supporting this argument is the relatively new issue of long-term unemployed -- those people without a job for six months or longer. In September, this group was almost 22% of the jobless. According to Bear Stearns, this rate has been prevailing since October 2002 -- the longest stretch in U.S. history.

The most-recent BLS report also notes an increase in workers who hold multiple jobs, and those who are involuntary part-time workers. This suggests that people are taking an additional part-time job to help make ends meet. In some situations, people are substituting two or more part-time positions when they cannot land a full-time job.

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Barry Ritholtz is chief market strategist for Maxim Group, where his research and market analysis are used by the firm's portfolio managers and clients in the U.S., Europe and Japan. He also publishes The Big Picture, his macro perspectives on the economy and geopolitics, entertainment and technology industries. At the time of publication, Ritholtz had no position in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Ritholtz appreciates your feedback and invites you to send it to [e-mail].