Augmented Unemployment Rate Goes Legit - TheStreet

Alan Greenspan's

new favorite economic indicator can now be followed by everyone else.

Before this month, the so-called augmented unemployment rate couldn't be accurately calculated because government statisticians hadn't started to seasonally adjust one of the sets of numbers that goes into it.

That changed with the release of the January

employment report

last Friday.

What is this augmented unemployment rate?

The

regular

unemployment rate -- the one that's a headline component of the employment report -- is calculated as follows. The

Bureau of Labor Statistics

counts the "civilian noninstitutional population," which is simply civilians at least 16 years old. That group gets divided into the labor force and people not in the labor force.

One might think the labor force includes only people with jobs, but that's not the case. It also includes the officially unemployed. To be officially unemployed, you need to have tried to get a job during the four-week period before the survey.

The unemployment rate is calculated by taking the number of officially unemployed and dividing by the total labor force. In January, the unemployment rate dropped to a 30-year low of 4.0%, from 4.1% in December.

But for the last year, Greenspan has been musing about the

augmented

unemployment rate, suggesting that perhaps it is a better measure of the tightness of the labor market -- and thus of the economy's ability to withstand inflationary pressures -- than the regular unemployment rate. (See our Nov. 22 feature

Meet the Augmented Unemployment Rate.)

It's easy to see why. The augmented unemployment rate takes into account not just the officially unemployed, but also what Greenspan calls the pool of available workers -- people who would like a job, but who aren't counted among the officially unemployed because they haven't searched for one in the last four weeks.

It's calculated as follows: To the number of officially unemployed is added the number of people who want a job but haven't looked for one. Call them the unofficially unemployed. The total is divided by the sum of the labor force and the unofficially unemployed.

The BLS has been tracking the number of unofficially unemployed since 1994. So what's new?

Seasonal adjustment.

The regular unemployment rate is calculated using seasonally adjusted numbers. But until this year, not enough data had accumulated to seasonally adjust the numbers of unofficially unemployed.

With the December employment report, a full six years' worth of data on the unofficially unemployed had accumulated. With the January report, the BLS seasonally adjusted the numbers.

Before, the best one could do, without seasonally adjusting the numbers oneself, was to combine numbers that aren't seasonally adjusted with numbers that are. Now, one can do a legitimate calculation.

Such a calculation reveals that the labor market is no less tight by this measure than as measured by the regular unemployment rate.

As this chart shows, the augmented unemployment rate dropped from 7.02% in December to 6.85% in January, the lowest rate of the entire period.

The Augmented Unemployment Rate
The number of unemployed plus job seekers not in the labor force, divided by the labor force plus the job seekers

Source: Source: Bureau of Labor Statistics

On Nov. 16, the

Federal Open Market Committee

released a

statement indicating that the augmented unemployment rate would play a large role in determining how much more the

fed funds rate

would have to rise.

At this point, the statistic isn't getting much attention because the FOMC's near-term course of action is reasonably clear.

When it hiked the fed funds rate to 5.75% from 5.5% on Feb. 2, the committee dropped a big hint that it would probably hike again at its next meeting on March 21,

saying it was concerned about "inflationary imbalances" in the economy. And in any case, there has long been broad agreement on the Street that the Fed would probably hike rates by at least 50 basis points during the first quarter.

But once this period of certainty is over, the newly legitimate augmented unemployment rate may find itself in the limelight. Its current wallflower status is purely a function of the monetary policy environment,

Daiwa Securities

chief economist Michael Moran says. "When we get into a gray area, this number is going to be right up there among the key things people are looking at."