misLeading Indicators: How to reliably measure your business

The definitions of performance indicators are critical: the case of unemployment.

Posted on | June 9, 2011 | No Comments

The US Bureau of Labor statistics calculates inflation several different ways. The mostly widely reported is U-3, and what people generally call the “unemployment rate.” U-6 has a broader definition and includes discouraged workers and those that work part time because they cannot find full time work.

In the 1930’s depression many workers were given “work-relief” jobs. Were they employed or unemployed?  The official numbers counted them as employed. Robert Margo, a professor of economics at Vanderbilt University,  compared two versions of the depression unemployment numbers, one which counted them as unemployed (by Lebergott), which seems quite reasonable, and the other as employed (by Darby).  Lebergott’s unemployment rate was greater than Darby’s rate every year from 1930 to 1940, sometimes by more than 5%.  (See here or here)

A similar discrepancy exists today.  According to John Williams at www.shadowstats.com,  the U-6 rate does not count long-term discouraged workers. When they are added to the calculation, the unemployment rate is about 5% higher than the U-6 rate.

The striking thing is that the Shadowstat’s number for today is about as high as Lebergott’s depression era unemployment rate in the 1930′s (see below. Chart Courtesy of ShadowStats.com.

SGS

What is the “correct” measure of unemployment? We can debate endlessly how best to define and measure it. The lesson is that you must understand how an indicator is defined is you are going to make any sense of it. The definition is critical, as are the motivations behind it.

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