If you're one of those people who look at the official unemployment rate, and wonder where in the world the bean-counters come up with a figure that seems low, listen up! There's a nice little explanation on how the unemployment rate is figured, on the website EconEdLink, lesson EM219.
Basically, it takes the number of unemployed, and divides it by the sum of the unemployed and the employed. Straighforward enough, until you see where the omissions can crop up.
Officially, there are about 7.1 million unemployed, and 143.7 million working. Apply the formula, and you get unemployment of 4.47 percent (continued).
But when you look at what's omitted, there are 1.3 million people who have stopped looking for work for 4 months or more, and another 928,000 who are "in transition." Apply these numbers to the formula, and unemployment works out to about 6.2 percent. Thus, the "thumb on the scale" factor works out to about 0.9 percent--or almost a full percentage point.
There was a heated debate a while back over what the "natural rate" of unemployment really was. More or less a consensus emerged around 5 percent--although different schools of thought would still give you an argument about it.
Thus, a quick glance at the official rate would leave the average reader thinking that the economy was strong, but a look at the adjusted rate leaves the impression that the economy remains soft by almost a full percentage point. Why care? Because companies are setting their budgets over the summer, for ratification in the fall, and if they read the economy as weak, then there is less incentive to offer higher raises, because it probably means that there are workers out there who will work cheaper than the ones already in the company. Something to think about for the 2006 election.