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Depending How You Measure, MN's Unemployment is 220K or 410K

August 11, 2010 By Lee Egerstrom, Economic Development Fellow

Conflicting reports of laid-off workers being recalled to jobs in Europe while the U.S. was laying off temporary Census workers in July call into question just how government unemployment statistics are gathered, and why there are such differences from one country to the next. 

Twin Cities newspapers reported Saturday that the "official" U.S. (U-3) unemployment rate for July remained at 9.5 percent - the same as in June. A broader measure of people out of work, called the U-6 unemployment rate, was slightly improved at 16.5 percent. Specific data for Minnesota and other states will be released later this month.

Similar reports from European countries that are more engaged in stimulus and anti-recession interventions show equally wide disparities - although generally lower unemployment rates - in recently released data. How can this be? Doesn't being without a job mean you are unemployed?

Joseph Ritter, a labor market expert at the University of Minnesota, sheds light on how different countries count the jobless. A recent Minnesota 2020 report also offers insight on why economic recovery efforts are bringing different responses in Europe than we're seeing here at home.  (That report, "The Middle Way," explores the mechanisms Sweden and Northern European countries used to pull out of the Great Depression and how it applies to the current Great Recession.) 

Ritter, an associate professor of applied economics, said most countries start with an internationally accepted protocol for measuring unemployment. Then each country makes modifications to the methods of counting germane to their countries. This skews results for anyone wanting to make international comparisons.

For instance, the U.S. Labor Department and Census Bureau monitor the employment status of people age 16 and older; Swedish statisticians start counting from age 15.
The Labor Department has different measures designed to help government planners, academics and financial and industry economists analyze what is happening. These measures look convoluted to laymen even when they serve as monthly signals that things are getting better or worse. In that regard, these measures are similar to watching daily bounces of the Dow Jones or other securities indexes without knowing what stocks or financial instruments are being traded.

In a helpful local story on Saturday, the Pioneer Press' Julie Forster cited the broader U-6 measure for Minnesota in June that showed 13.9 percent unemployment while the U-3, or "official" unemployment rate, was a more modest 6.8 percent.

The difference is that the "official" rate meant 220,000 Minnesotans were looking for work. That doesn't count Minnesotans who might actually have some part-time employment but want full-time jobs, have given up looking for work in the current economic environment, have exhausted unemployment benefits, or have fallen into some other crack in the system that makes them cease being an official statistic.

Combine the two groups and at least 410,000 Minnesotans are in need of good jobs. Which also means there are nearly a half-million Minnesotans who can tell you about hardships from unemployment and under-employment for them and those who depend on them.

The University's Ritter, however, said any of the Labor Department's measures work to show monthly changes. Two years ago at the start of the recession, he said, he looked at the different measures and found that the U-3* and U-6 measures closely tracked. So, if unemployment of the former rose from 5 to 6 percent, the larger measure would usually jump from 10 to 12 percent.

This gives people signals about how purchasing power is either expanding or retreating, or other signals that reflect the health of the economy.
Compare these differing data sets with employment news coming out of Europe in recent days.

Swedish authorities reported on Friday that the unemployment rate in their country jumped to 9.5 percent in June - or the same as the U.S. percentage for July - and that was up from 8.8 percent in May.

But Sweden is supposed to have one of the stronger economies among the developed nation states. What's going on?

Schools let out in June. The Swedish Finance Ministry reported that 29 percent of Sweden's unemployed in June were full-time students. If high school and university students don't line up a good summer job or internship, they draw unemployment benefits to sustain them - and sustain the Swedish economy through consumer purchasing power - until fall school terms resume.

Smile if you want, but this generous interpretation of unemployment means this: Without the students' presence on the unemployment roles, the Swedish Finance Ministry estimated "real" unemployment was 8.1 percent in June, down from 8.8 percent in May. The unemployment benefits have also helped Sweden reach a projected 3.3 percent GDP growth for the year and created more private sector jobs.

Over in Germany, meanwhile, July unemployment fell for the 13th straight month on its tweaked measures that are different than both the U.S. and Swedish systems. Adjusting for seasonal quirks - which would toss out the German equivalents of Sweden's students - the German official jobless rate was 7.6 percent.

Rainer Buergin and Christian Vits, writing for Bloomberg News, said the strengthening global economy was helping Germany's export-driven economy despite southern European and other nations cutting employment to cope with public debt - often at the expense of economic growth.

Keep in mind Germany created "Cash for Clunkers" and a whole bunch of other programs that we and other nations copied to stimulate our economies. Now, the conservative (by German descriptions) government is pondering how it might recapture some of the windfall profits from German auto manufacturers it bailed out, and it has started looking at ways to force the multinational pharmaceutical companies ("big pharma") to lower drug prices for senior citizens.

Looking beyond how the numbers are calculated, European policies are a strong indicator that America and Minnesota are out of step with global progress. We are cutting faculty at our colleges and universities while making education more expensive for people who would like to prepare for future opportunities. We intentionally cut employment at state and local levels, adding to unemployment even as federal programs are trying to stimulate jobs and the economy.

Unemployment, and reduced personal and household purchasing power, is a great deterrent if not an impossible obstacle to economic recovery. That is because the U.S. is a nation where personal and household consumption accounts for 70 percent of Gross Domestic Product (GDP). It is assumed the same applies in Minnesota.

Going forward, Minnesota corporations and businesses should look more closely at how unemployment data impacts their bottom lines. This is especially important for retailers. They should carefully consider how they spend corporate revenue to influence public policy and elections. 

Policies that promote divisiveness and holding classes of people back from opportunities aren't good for business. German and Swedish business executives may not be all that different from their American counterparts, but at least they are complaining all the way to the bank.

*Measurement of Labor Data by the U.S. Labor Department and Commerce Department

U-1 is the percentage of unemployed for 15 weeks or longer;
U-2 is labor that lost jobs or completed temporary work;
U-3 is the "official" unemployment rate, as referenced above;
U-4 is U-3 plus discouraged workers who have stopped looking for work;
U-5 is U-4 plus people who would like but haven't looked for new work recently;
U-6 is the tally from above, plus everyone who wants to work full-time but cannot find such employment.

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