Unemployment down, means it's actually up

Max Sawicki at Max Speak, You Listen notes some interesting facts from the president's new budget proposal.

On page 7, the budget touts the remarkable strength of the economy in jobs, pointing to the rapid decline in the unemployment rate from 6.3 percent in June 2003 to 4.9% at the end of 2005.

At page 171, the budget states, "The extraordinary fall-off in labor force participation, from 67.1 percent of the U.S. population in 1997–2000 to 66.0 percent in 2004–2005, appears to be at least partly cyclical in nature, and most forecasters are assuming some rebound in labor force participation as the expansion continues."

Max leaves the reader to do the arithmetic, but I'll patronize a bit and walk you through it.

What this means is that for every 100 people in the country today, 66 are actively in the labor market, either working or seeking work. Since the unemployment rate is 4.9%, 4.9% of those 66 or 3.234 people are unemployed.

Now, since the participation rate has fallen from 67.1% of the population to 66.0%, another 1.1 (67.1-66.0) have left the job market, probably because they have become discouraged.

So in fact, there are 3.234 people unemployed and 1.1 people out of the market who might otherwise be in the market if jobs were more plentiful. If we consider them all part of the unemployment pool (as the above quote suggests they should be), then in fact there are 4.334 people unemployed in a total pool of potential employees of 67.1.

That makes today's effective unemployment rate 6.5% (4.334/67.1).

In the year 2000, the BLS tells us the unemployment rate averaged 4.0%.

So, whoopee! George Bush's economic boom has done such great things for the labor market that the effective unemployment rate has risen from 4.0% in 2000 to 6.5% today.

Update: Just to put that in perspective, that's a 62.5% increase in the unemployment rate.

For the math challenged: [62.5 = 100x(6.5-4.0)/4.0]