Why The Real Unemployment Rate Is Actually Even Worse

(CBSNewYork) -- The U.S. economy is sharply contracting as many businesses close their doors and consumers shelter in place from the coronavirus. Closed businesses mean lost jobs, hopefully temporary but quite possibly permanent. Lost jobs mean less spending. And even those lucky enough to keep their jobs have fewer places to spend their money. A wide range of non-essential businesses, from sit-down restaurants and movie theaters to daycare centers and after-school programs, remain shuttered in much of the country.

The contracting economy has caused a spike in unemployment. The U.S. job market just endured its worst month on record, with payrolls shedding 20.5 million workers in April. (For a little perspective, the previous worst month was September, 1945, when 1.9 million jobs disappeared following World War II.) Unemployment jumped from 4.4 percent in March to 14.7 percent in April. The economy ended February at 3.5 percent unemployment, but that rate has more than quadrupled since.

The official unemployment rate is calculated by dividing the number of unemployed people by the number of people in the labor force. The numerator in that equation is currently over 23 million. (The denominator is currently approximately 156.5 million.) Both the unemployment rate and the number of unemployed are staggeringly high, and both understate the toll coronavirus is taking on the economy. The actual percentage and total are much higher.

"We understand that unemployment means you don't have a job," according to Giacomo Santangelo, who teaches economics at Fordham University and the Stillman School of Business at Seton Hall University. "The problem is that the official unemployment rate, as measured by the Bureau of Labor Statistics, does not measure that. The official unemployment rate is the percentage of the labor force that is without a job. The problem is [that] the qualifications to be in the labor force are very narrow. It's part of the reason why the official unemployment rate right now is 14.7 percent, but the actual percent of people who are unemployed is closer to 23."

To be in the labor force, a person must be employed full-time or actively looking for work. Workers who are now working part-time for economic reasons, unemployed and not looking for work or out of the workforce entirely are not counted.

According to the BLS news release announcing April's unemployment numbers, "the number of persons at work part time for economic reasons nearly doubled over the month to 10.9 million. These individuals, who would have preferred full-time employment, were working part time because their hours had been reduced or they were unable to find full-time jobs."

That means almost 11 million people are now working part-time when they'd rather work full-time. They are no longer part of the labor force, at least as far as the official unemployment rate goes.

Part-time workers who were recently laid off were never part of the labor force total used to determine the unemployment rate. According to Santangelo, "we understood that when restaurants closed, those full-time employees were going to be furloughed, those full-time employees were maybe going to become unemployed. When we saw the increase in the unemployment numbers, we expected that to happen. Not reflected in those numbers were all of those part-time employees, the busboys, the bartenders, the kitchen staff who only work part-time. They also lost their jobs, but we don't count them, because they're part-time workers."

And then there are "persons not in the labor force who currently want a job," as the BLS describes them. Santangelo puts it another way. "If you've been unemployed for too long, meaning you really want to get a job... if a job made itself available, you would take that job, but it's been six months, and you haven't had a job... You're no longer in the labor force."

These people don't count as unemployed either, because they didn't actively seek work "during the last four weeks." This number almost doubled in April to 9.9 million people. It's important to note that since mid-March, most companies haven't been hiring and much of the country have been under shelter-in-place orders. In other words, actively seeking work was largely pointless.

The real unemployment rate -- as opposed to the official unemployment rate -- is sometimes referred to as the U-6. The BLS defines this as "total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force."

According to Santangelo, "the difference between the official rate of unemployment (14.7 percent) and what's referred to as U-6 (22.8 percent), which is much closer to the truth, is generally 10 percent." The April jobs report showed the difference to be slightly less but still significant.

A 22.8 percent effective unemployment rate is way worse than the much-publicized 14.7 percent. Even more sobering is that the unemployment rate -- however it is defined -- is a lagging indicator. It's a look back to the previous month. The job market has only deteriorated since April, and May will likely add more people to the ranks of the unemployed.