Running head: The Myth of the Unemployment Rate 1

The Myth of The

Unemployment Rate
A CHANGING OF AN INDIVIDUAL’S PERCEPTION
WES HUGHES

EGCC College
The Myth of the Unemployment Rate 2

A CHANGING OF AN INDIVIDUAL’S PERCEPTION

When Paul Simon sings, “When I think back on all the crap I learned in high school, it’s

a wonder I can think at all…” (Simon, 1973), a piece of information comes to mind that I learned

over 40 years ago. It was that the unemployment rate was a number that was computed by the

government using actual numbers of unemployed people. Fast forward to today. My beliefs

haven’t changed, but it’s not just me. I did an impromptu poll (as seen in the diagram below) on

a social media site and prompted the question; how does the government collect its

unemployment data? Although the sample size is just over 100, the results backed my theory,

that most people don’t know how the rate is collected, computed or analyzed. Before I can

analyze the validity of the rate, I need to understand the process.

How Does Government Collect

Unemployment Data?
Government
Don't Know
Survey
12%
7%

Actual
Unemploy Data
81%

Government Survey Actual Unemploy Data Don't Know

Now that I have learned that the rate is computed through a survey, some questions now

arise. How and when was this survey created? What exactly is it and is it accurate? There are too

many financial decisions and policies are based on that rate. “In general, economists have found

that when the unemployment rate drops below a certain level, referred to as the natural rate, the
The Myth of the Unemployment Rate 3

inflation rate will tend to increase and continue to rise until the unemployment rate returns to its

natural rate.” (htt) That’s why a more accurate rate is crucial.

The Merriam-Webster dictionary defines unemployment as “involuntary idleness of

workers”. (Webster, n.d.) The financial world describes it as the percentage of employable

people in a country’s workforce who are over the age of 16 and actively seeking work.

Unemployment is defined by the Bureau of Labor Statistics as people who do not have a job,

have actively looked for work in the past four weeks, and are currently available for work

(Amadeo, 2019). The definition of the unemployment rate is not universally agreed upon. One

might argue the natural rate is the best, whereas others will counter that the real rate is more

accurate. So how is the rate determined?

The survey is used to collect the data to be compiled for the rate is currently called the

Current Population Survey, or CPS. As part of his New Deal program in 1935, President

Franklin Roosevelt creates the Works Project Administration (WPA) program to help pull

America out of the great depression. It helped over 8.5 million people find jobs. It helped

employ mostly unskilled men to carry out public works infrastructure projects. They built more

than 4,000 new school buildings, erected 130 new hospitals, and laid roughly 9,000 miles of

storm drains. (History.com, n.d.)

The need for better statistics and a more accurate determination of the rate became

increasingly more important in the second half of the 1930s. Surveys were tested by federal, state

and local and those concepts led to a survey called the National Report of the Unemployed. It

was given to the Census Bureau in 1942 and later renamed the CPS, as it is known today. The

CPS had a major overhaul in 1994 to better capture the data and it is redesigned every decade.
The Myth of the Unemployment Rate 4

The Bureau of Labor (BLS) uses that data to compile its monthly report on the employed and

unemployed people in the U.S.

So how is that information collected? All the cities and the counties in the U.S. are

grouped into approximately 2000 geographic areas called sampling units. Inside those sampling

units, there are 60,000 eligible households which translate into 110,000 people. (BLS, n.d.)

Survey responders are classified based on how they responded to a specific set of questions

based on their recent activities. (htt2) Although the survey is on a volunteer basis, the more

accurate and active participants are, the stronger the data is and therefore a more accurate picture

of the employment/unemployment picture.

Each question is assigned a value and all households and individuals are given a weighted

value to make the survey more balanced. After all the interviews are completed, the data is

assembled and the unemployment numbers are classified into 6 categories, U1 through U6. They

each calculate different aspects of unemployment. The U3 category is the official government

unemployment rate (also called the natural rate) whereas the U6 is considered the real rate. The

differences between the categories are the number of people who are counted for that category.

Below is a chart showing the differences between U3, U5 and U6 categories from 1995-2015.
The Myth of the Unemployment Rate 5

The who, what and how have been addressed. Now it’s time to focus on the elephant in

the room. First how accurate is the information? As I’m researching and reading, it depends on

who you ask. A politician will always focus on the U3 rate as it makes them look like their

policies are working. Some economists will counter that need you to include all the available

workforce in the rate(U6). “As I noted in March 2015 Macro Tides, the U-6 unemployment rate

is a better indicator of labor market slack than the widely followed U-3 unemployment rate.

While the (U3) gets the headline every month, the U6 unemployment rate, an alternate measure

of the labor market, probably provides a better measurement of the actual amount of slack in the

labor market.” (Welsh, 2018) Second, we live in an age where data can be shared between

computers at such a tremendous rate that incorporating actual unemployment claim data could be

somehow be thrown into the mix. Third, there’s also a human nature component to this. Whether

it’s the person doing the interviews, or the person being interviewed, no data is completely 100%

accurate. The data needs to be as accurate as possible. The rate is an indicator of how well the

economy is performing. Maybe with the constant review and revisions of the survey, someday

there will be a survey that is less of an estimate and more of a true representation of the

unemployment picture. Since the 85% in my survey, including myself, have no input, we’ll just

have to live with the process for now and abide by the saying, “Ours is not to reason why….”.

(Tennyson, n.d.)
The Myth of the Unemployment Rate 6

References
(n.d.). Retrieved from https://www.everycrsreport.com/reports/R44663.html

(n.d.). Retrieved from https://www2.census.gov/programs-

surveys/cps/techdocs/questionnaires/Labor%20Force.pdf

Amadeo, K. (2019, March 28). Retrieved from https://www.thebalance.com/what-is-unemployment-

3306222

BLS. (n.d.). Retrieved from https://www.bls.gov/cps/cps_htgm.htm#where

History.com. (n.d.). Retrieved from https://www.history.com/topics/great-depression/works-progress-

administration

Relations, E. (n.d.). H.R. Insiders. Retrieved from https://www.hrcapitalist.com/2017/01/know-your-hr-

stuff-the-difference-between-u3u5u6-unemployment-rates.html

Simon, P. (1973). Kodachrome. The United States. Retrieved from https://genius.com/Paul-simon-

kodachrome-lyrics

Tennyson, A. L. (n.d.). Alfred Lord Tennyson Quotes." BrainyQuote.com. BrainyMedia Inc. Retrieved April
15, 2019, from https://www.brainyquote.com/quotes/alfred_lord_tennyson_101361

Webster, M. (n.d.). Retrieved from https://www.merriam-webster.com/dictionary/unemployment

Welsh, J. (2018, November 5). (Marco Tides) Retrieved from

https://www.advisorperspectives.com/commentaries/2018/11/05/when-will-the-federal-
reserve-hit-the-pause-button