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The Real Unemployment Rate Is 14.3%

Re-factoring the number part-timers for economic reasons gives a more accurate picture of the unemployment landscape.

CLAYTON, N.C. (TheStreet) -- The U.S. Department of Labor (DOL) announced the unemployment data for July this morning. The headline number is the official unemployment rate, U-3, which came in at 9.4%, down from 9.5% in the last report at the end of June.

The official unemployment rate is determined by a body count. It does not differentiate between a person who works a full work week (nominally 40 hours), a reduced full-time work week (say 35 hours) and someone who works part-time (less than 35 hour per week). If the unemployment rate was calculated from total hours worked, the DOL data would produce an unemployment rate of 14.3%, defining a full work week as 40 hours. This is a decline from 14.5% for June.

In determining the real unemployment rate, those who work part-time by choice are deducted from the 40-hour calculation. The U.S. Department of Labor designates these people as "part-time for non-economic reasons." These people are presumably working as much as they want. Therefore, I count each of these folks as an equivalent to full-time employment for the purpose of calculating the extent of unemployment.

All other part-timers "for economic reasons" -- reduced-hours full-time employees -- are counted fractionally, depending on what part of the 40 hours they work. The term "part-time for economic reasons" covers those who want full-time work but could find only part-time positions or have had their formerly full-time hours cut to less than 35 hours per week.

The factors used in calculating the real unemployment rate are listed in the following table, with data from today's DOL report compared to the previous report in June:

It is not clear whether this picture is improving or not. Here is the short list of items clouding the issue:

  • The uncertainty in each of the numbers is of the order of +/-300,000. This means that a small change of 0.1% in the unemployment rate is well within measurement error uncertainty.

  • The number of jobs lost (257,000) was dominated by a large increase in part-time employment (420,000). The part-time employment change included 125,000 more involuntary part-timers (part-time for economic reasons). This indicates employment may still be degrading.

  • The average work week increased to 33.1 hours. This indicates employment may be improving.

  • The labor force shrank by more than the measurement error. This is the largest contributor to the decrease in the official unemployment rate to 9.4%. If this is due to an increase of the permanently discouraged dropping from the labor force, it is an indication that employment may still be degrading.

In this recession, employment may have a bigger effect on the strength of a recovery than in the last recession. The reason is that the housing and home construction collapses have been a significant contributor to this recession. A stronger recovery will depend on a return of higher levels of consumption.

Consumers are less likely to spend until they escape from the weight of falling home prices and fear of losing employment. The two factors are linked. Stabilization and recovery in housing cannot be expected to occur until we are near a peak in unemployment. In spite of today's data, that peak may still be many months away.

With the latest data, we have not yet reached the level of unemployment seen in the 1981-82 recession when measured by U-3. The level of "real" unemployment nearly equals that previous 50-year high because it recognizes the severe reduction in work hours that are missed in the official unemployment number, as shown in the graph below.

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The greater severity of unemployment now compared to previous recessions is more evident in the graph below, which shows the difference between the two (the real unemployment rate


U-3). The difference far exceeds anything seen in the past 50 years.

President Obama said this morning that he still expects that the official unemployment rate could reach 10%, which could well happen. That number is just outside my estimate of uncertainty in the current number. This estimate is that 9.4% unemployment really means the rate is somewhere between 9.0% and 9.8%. If the past two recessions are any guide, this peak in unemployment may occur between one and two years from now.

-- written by John Lounsbury in Clayton, N.C.

At the time of publication, Lounsbury had no positions in the stocks mentioned.

John B. Lounsbury is a financial planner and investment adviser, providing comprehensive financial planning and investment advisory services to a select group of families on a fee-only basis. He worked for 34 years with IBM, and spent 25 years in R&D management and corporate staff positions. He also was a Series 6, 7, 63 licensed representative with a major insurance company brokerage for nine years.

Specific interests include political and economic history and investment strategy analysis. He holds degrees from the University of Vermont, Columbia University and the Illinois Institute of Technology, where he studied chemistry, physics and mathematics. He is a contributor to Seeking Alpha and his own blog,