US Unemployment Rates Are Misleading

Kesha Calhoun, 25, left, and Kristin Merritt, 20, both of Detroit, share notes at a Cobo job fair. Michigan leads the nation in unemployment. (Clarence Tabb Jr. / The Detroit News), a photo by Pan-African News Wire File Photos on Flickr.

ESSAY

Ignore the Unemployment Rate

The most totemic statistic about the U.S. economy is archaic and misleading

By ZACHARY KARABELL
Wall Street Journal
Updated Feb. 7, 2014 8:57 p.m. ET

What percentage of working-age Americans are in the workforce? Who has given up looking for work? WSJ's Jason Bellini has #TheShortAnswer.

At 8:30 a.m. Friday, the U.S. Bureau of Labor Statistics released its monthly employment report, as it does at the start of every month. As usual, the announcement was widely covered in the financial and mainstream media—a convenient hook for commentary about the state of the economy, the arc of the recovery and the future of the U.S.

The unemployment rate was a central factor in the 2012 presidential election, with President Barack Obama seemingly defying a powerful historical trend and winning re-election while the rate hovered at 8%. It was used to justify the nearly $800 billion stimulus bill in 2009. And the rate has remained in the spotlight through the early weeks of 2014, as the 1.3 million Americans receiving long-term unemployment benefits have become a source of political theater and ideological debate.

The unemployment rate, in short, is one of the most consequential numbers shaping our body politic. Unfortunately, it is also one of the most misleading.

It isn't just that the number is a statistical artifact, involving substantial estimation and frequent adjustments. Nor is it because the unemployment report as a whole combines two rather different surveys—one of 557,000 businesses and their payrolls, another of 60,000 households—each of which sheds a different light on the jobs picture.

The real problem is that the number, originally designed for limited purposes, has come to assume totemic status. Focusing so single-mindedly on this one employment figure has made it impossible to have a cogent discussion of labor in the U.S. and to design meaningful responses to our varied economic problems.

The U.S. government began to define and measure unemployment seriously only because of the Great Depression. As the crisis hit suddenly in 1929, the Hoover administration had no way to know just how bad things were. A bigger budget for the sleepy Bureau of Labor Statistics soon led to the initial U.S. efforts to first define and then count unemployment.

This early push showed that the Depression was substantially worse than suspected, which gave Franklin Roosevelt a powerful argument for change in the election of 1932. Herbert Hoover, a devotee of the scientific management of government, was hoist on his own statistical petard.

It took more than a decade for methods to be refined, for sample sets to be introduced and survey methods improved. It also took years to decide what, precisely, was meant by unemployment, leading to the definition that still stands: namely, that the unemployed are those looking for work who can't find it, rather than (more simply) those who don't have a job that pays a wage. Not until the 1950s did the BLS make any fanfare of its monthly reports, and not until well after that did reporters or politicians pay much attention to them.

What's wrong with this one number, aside from its outsize influence on our politics and economic self-image? The fact is, there simply is no national unemployment rate.

If you closed your eyes and put your finger on a map of the U.S., you would hardly ever point to a place where the unemployment rate precisely matched the national number calculated by the government. But our approach to unemployment treats the number as real and sacrosanct rather than as an average masking huge variations.

If you are a college-educated woman, your unemployment rate is less than 4%. If you are an African-American male with a high-school diploma or less, the rate is well into the mid-20s, and it is in the teens for Hispanics at that education level. If you live in Nebraska or North Dakota, there has been no unemployment crisis in the past five years, and the rate has consistently stayed below 5%. If you live in the areas hit hardest by the bursting of the housing bubble—Central California, Greater Phoenix, Las Vegas, vast swaths of Florida—or the areas decimated by the woes of the auto industry, the unemployment rate has frequently been above 10%.

The unemployment rate is one of the most consequential numbers shaping our body politic. Unfortunately, it is also one of the most misleading, says Zachary Karabell.

We have multiple unemployment rates—by race, gender, geography and above all educational attainment. When people talk of an unemployment crisis, it would be more accurate to speak of an education crisis or a crisis of men whose skills are mismatched to today's jobs. It would be more accurate to speak of a jobs crisis in specific regions of the country or for specific industries. Yet we maintain the collective fiction that one simple average accurately captures multiple realities.

A national average had its utility in the mid-20th century, especially in helping us understand the nature of a massive labor force. It brought about the collection of a vast amount of data, which now allows us to see just how disparate the job situation is from one part of the country to another.

Today, however, we need to pay much more attention to the details of the data and much less to an average that obscures far more than it reveals. This shift would allow us to design policies for those segments of the economy and the labor force where help is most needed.

True, Congress is especially bad at allocating resources selectively, except in the case of natural disasters or to industries such as farming that cut across enough states to form a voting coalition. It would be hard going to craft legislation that would focus on the needs of Detroit, Phoenix, central Florida, upstate New York and so on.

But such targeted legislation is the only cost-effective way for government to address the structural issues of unemployment. Spending tens of billions of dollars a year on unemployment benefits is perhaps the least effective way to deal with the problem. It relies entirely on the belief that once this thing called the economy gets humming again, employment will just materialize. But for many Americans who are bearing the brunt of the downturn, that is unlikely to happen. And we will have spent years of benefits with nothing to show for it.

Our fixation on the unemployment rate stands in the way of creative and innovative approaches, some that would involve government and others that wouldn't. It locks us into a collective fiction that employment is a national problem with national solutions, rather than a symptom of myriad other, highly localized issues.

The unemployment rate has outlived its use. It is time to say goodbye to it—and to plunge into the wealth of information we have about the economic world in which we actually live and work.

—Mr. Karabell is head of global strategy at Envestnet, a financial services firm. This essay is adapted from his new book, "The Leading Indicators: A Short History of the Numbers That Rule Our World," published by Simon & Schuster.