The unemployment rate for August dropped to 5.1%, which is well below July's 5.3%. The 5.1% rate is the lowest since April 2008. Good news, right? Wrong! Our economy is still not adding enough jobs to cover new entrants into the workforce. Well then, how did that unemployment rate drop from 5.3% to 5.1%? It is all in the way the unemployment rate is calculated. I will try to make this as pithy as possible. First, the formula for the unemployment rate is equal to the "number of unemployed people divided by the number employed plus unemployed." Therefore, according to the equation, if you are no longer looking for work, because you are discouraged or can not find a job, the rate must go down. Therein lies the problem. For August, 261,000 individuals dropped out of the labor force but we only added 173,000 jobs. According to the Bureau of Labor and Statistics, who calculates the unemployment rate, those individuals, who can not find work or become discouraged after four weeks, are no longer considered unemployed. How illogical is that thinking? Just because one can not find a job, the government thinks that individual is satisfied with his or her lot in life. Second, given the 261,000 individuals are no longer being counted as unemployed, the labor participation rate is at the lowest rate since 1977, or 94 million individuals are no longer in the labor force. And, then, we have those economic pundits on the major cable channels claiming that since the unemployment rate is at 5.1% everything is just great.
Knowledge is powerful. The only problem is that one has to search diligently for it and then apply it.
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