Letter to the Editor: About That Unemployment Rate

01 May 2014   Philip LaMaster
"The unemployment rate is not a good indicator of economic wealth."

It often seems as if the largest issue on American minds is that of the economy. People have been scarred by the recession that it took us so long to get out of. Of course, a politician can never neglect a good crisis - so immediately following the crisis it seems as if every politician in the country looked in the mirror and practiced telling a very simple lie- I created x number of jobs. Don't take their words without enough salt to fill a small pick-up though. There is a fundamental economic fallacy behind these words. The unemployment rate is not a good indicator of economic wealth.

What is wealth? Wealth is stuff. Wealth is goods like diapers, Mercedes, mansions, Wrangler Jeans, deodorant, soap and even Top Ramen and services, such as an oil change or a massage. The goal of an economy is to produce wealth - ie. goods and services - and to distribute them.

So, when we talk about how well an economy is functioning, the fundamental question is: is it producing wealth and distributing it? Note that the question is not a question of fairness, it's one of function.

Fundamentally then, if one desires to measure an economy, one should measure these two functions. Gross domestic product (GDP) measures goods and services produced within an economy. Although in practice, many goods and services are not easily measured, fairly accurate estimates based on accepted methodology do exist and economists use them.

The creation of stuff then, is measured by GDP. The distribution however, turns out to be more difficult to measure, in fact, there simply is no single number that tells us how well an economy distributes the goods it produces. Average or median income, income inequality and consumption each look at a different facet of distribution.

Where does the unemployment rate fit in then? It doesn't. The unemployment rate is a measure of people who are looking for work and don't have it. If we're attempting to evaluate an economy, we don't need to know who is working and who isn't - we need to know how much is being produced and where it is going.

The unemployment rate doesn't measure what people are doing. If every PhD in the country began working at summer camps weaving lanyards, would our economy be healthy? Certainly not, even if it would be a great way to get rid of economists.

It also doesn't measure where the stuff is going - if those lanyards are tossed into a campfire every night we'd still have an unemployment rate of 0. Say we have an economy with one hundred workers. Every one of those workers is a worker at a retail store. Of those one hundred workers, one makes $600,000 a year, and every other worker makes $1500. Now, in this not-that-far-off scenario, we have an unemployment of 0. If we only used unemployment, we would say that this is a perfect scenario. However, if we look at median income, we see that it is only $1500. If we look at average income, it is only $7485 - still far below the US poverty line.

But everyone has a job? Isn't that great! Actually, not necessarily. Look at Soviet Russia - it had very little or no unemployment. But certainly it had a much lower quality of life than many Western countries with double the amount of people hitting the streets.

Simplifying our complex economy by using the unemployment rate has become the favorite ploy of journalists and politicians, but it's counterproductive. Economists have long known that the unemployment rate is of marginal importance at best. It's time that we held our politicians to the same standard.

Philip LaMaster is a writer currently studying economics at ASU's WP Carey School of Business. You can follow him @plamaste on Twitter.