At "A Dash" we are advocates of a careful, balanced consideration of economic data. We accept the results whether they are hopeful or dismal. We do not shift our chosen indicators with the wind. Investors should do the same.
Barry Ritholtz at The Big Picture, one of our featured sites, has made a useful suggestion concerning balanced reporting on unemployment. While we agree with his general point, there is a bit more to the story. Barry's opinions are quite important. The impact of financial blogs has increased, and he has the strongest voice, including his most recent accomplishment, the Gold Medal from an investment publication--nice going, Barry.
The Ritholtz Proposal
In his widely-read article Barry proposes that the financial media focuses too much on a single measure of unemployment, what the BLS calls U-3. He recommends that the media should also report the broadest measure, U-6, which also captures workers who involuntarily accept part-time employment.
With due modesty, Barry notes that many believe he has influenced the reporting of data in the financial press, and might do so again. We strongly agree with his conclusion. We think that the press could do a much better job of showing the nuances of unemployment, and that his voice is a strong one. The lead paragraphs often do not capture the full story.
A Point of Disagreement
Barry believes that the definition of U-3 has changed over time to paint a more favorable picture of unemployment. He writes as follows:
U3 is the "official unemployment rate" according to the BLS website. Due to this, it is the current measure of Unemployment that gets focused upon by most media, and therefore the public. It has, over the years, slowly excluded many of the factors that USED to go into how the US reported unemployment. Hence, there has been a gradual decrease in the Unemployment rate that has occurred regardless of what was happening in the Jobs market.
U3 is now comprised in a way that merely repeating it without a slew of caveats borders on fraud.
We disagree with this conclusion. If one goes to the source he cites, and actually reads the article, one sees something quite different. The authors write as follows:
The official measure has withstood the test of time largely because of its objectivity. As measured via the CPS, the employment status of individuals is determined solely by their work-related and job-search activities during a specific reference week. In essence, persons who did no work, but who searched for a job (sometime in the 4 weeks prior to the survey) and were currently available to take one had it been offered, are classified as unemployed. Those who met neither test are "not in the labor force."
The inherent objectivity of the official measure also explains, in part, why it and other statistics are occasionally subject to criticism. Without question, the consequences of unemployment are more serious for some workers than for others, and some users would like to have a more narrowly targeted measure. At the other end of the spectrum, there are those who feel that the official statistics understate the full dimensions of the unemployment problem.
The BLS has provided a range of different measures, beginning in the 70's but has not changed the definition of U-3. The assertion that this series compares "apples and oranges" is simply incorrect.
Our Own Suggestion
Please consider the table Barry cites, with a small addition from us.
We wish to augment Barry's proposal. We suggest that the media also report the narrowest measure of unemployment, U-1. We have circled these values in blue on the table. Barry's circles are in red. The U-1 measure has also moved negatively in the last year, rising from 1.5% to 1.8% during the last year. This is a 20% increase in longer-term unemployment, consistent with a slower rate of economic growth. It shows an important increase in long-term unemployment. Having said this, the overall rate of serious unemployment is much lower than the other measures. Why?
The narrow measure is important because of the concept of frictional employment. There are always people who are changing jobs because of personal choices, one partner in a marriage moving, or economic dislocation. At a time of economic change, one would expect frictional employment to be higher.
The narrow measure shows those who remain unemployed for fifteen weeks or longer. It captures important information about the severity of economic effects versus normal frictional changes.
For these reasons, we hope that Barry will also use his strong voice to advocate that media sources should cite this number, as well as the broadest possible measure.
A Related Matter
Earlier this month we proposed a reader contest related to The Big Picture, where we (somewhat whimsically) offered a reader prize for "an article on The Big Picture where Barry analyzed the data and suggested that the results were more positive for the market or the economy than the official report suggested."
To our surprise, Barry himself then wrote such an article and claimed the prize! Our Rules Committee has been sanctioned for poor drafting of the conditions! Meanwhile, our Prize Committee has determined that Barry won it under the terms stated. We have selected a nice prize from his "wish list" but wish to describe the Committee debate more fully in a future article. More later and prize to Barry will be forthcoming.
