Trends

The Truth About the Rising Unemployment Rate

photo: twicepix

The latest update to the Bureau of Labor Statistics’ official unemployment rate — an increase from 9.7% in March to 9.9% in April — has, ironically, been heralded by many as good news. After all, in April we did add approximately 290,000 new jobs.

That’s pretty strange, right?

The reason that the unemployment rate can increase when jobs are added — and vice versa: decrease while jobs are being lost, as happened on a few occasions in 2009 — is that the way the unemployment rate is calculated fails to take into account people who have simply stopped their job search. That’s exactly what had happened in 2009.

A more accurate unemployment picture

Yes, adding jobs in 2010 is a good thing for the economy. But we should not be quick to downplay the significance of the rise in the unemployment rate.  Essentially, that’s happening because we are just adding back in the numbers that were left out last year. To put it simply, the unemployment rate is actually becoming more accurate as it begins to take into account more out-of-work Americans who have started to actively look for employment.

Because, guess what: even though it is used as the main gauge on the health of the labor market, the official unemployment rate is hardly a perfect representation of our true unemployment situation.

If youre looking for a more accurate picture, you will need to dig a little deeper. One other measure you should consider is the so-called U-6 unemployment rate. What’s that? It’s a broader unemployment rate measure that takes into account people who have stopped looking for work or cannot find jobs. (The official unemployment rate, in contrast, only takes into account unemployed individuals who are actively looking for work.)

InApril, the U-6 rate increased to 17.1%: the third consecutive monthly increase, although the number is still below its October 2009 high of 17.4%.

Another helpful measure of the labor market is the duration of unemployment.  You can find those numbers on this table from the Bureau of Labor Statistics. It shows the number of unemployed based on how long they’ve been out of work. The bad news: the average duration of unemploylent was 33 weeks in April 2010, significantly higher compared to the 23 weeks in April 2009.  (Remember, if the average is more than 8 months, that means some people spend a year and a half or even more out of the workplace.)

This April, there were more than 6.7 million people who had been working for work for 27 weeks or more. Last April, that number was a little over 3.9 million.

Moving forward, do not be surprised if the unemployment rate continues to tick higher even as the economy continues to add jobs each month. With hundreds of thousands of Americans buying into the idea of an economic recovery, they will re-enter the job market and drive up the number of Americans looking for work.

In other words, economic recovery — specifically that of the labor market — still has a long way to go.

Kevin Duffey blogs on personal finance issues at 20smoney.com.