{"id":125432,"date":"2020-05-23T10:00:31","date_gmt":"2020-05-23T16:00:31","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=125432"},"modified":"2024-01-05T17:09:13","modified_gmt":"2024-01-06T00:09:13","slug":"unemployment-rate-affects-everyone","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/unemployment-rate-affects-everyone","title":{"rendered":"How the Unemployment Rate Affects Us All (Yes, Even the Employed)"},"content":{"rendered":"

In any epidemic (in this case pandemic), you have three issues that you have to deal with: public health, the economy, and social impact. As COVID-19 continues to unfold<\/a> and the death toll climbs, the scope of the economic impact of the Great Lockdown of 2020 is beginning to come to light.<\/p>\n

As of May 8, U.S. unemployment has skyrocketed to 14.7%<\/a> (numbers reflect as of mid-April). Now, you can argue all day long if this number is real and will get worse or if this number is artificial and will quickly drop when businesses reopen as stay-at-home restrictions are lifted.<\/p>\n

Instead, let\u2019s dive into what to do with this data as an investor.<\/p>\n

The Current Population Survey (CPS) evaluates unemployment in the U.S. and has six levels of rates for unemployment (U): U-1 being the most strict to U-6, which includes measures of both unemployment and<\/em> labor underutilization.<\/p>\n

The reported 14.7% unemployment rate is actually the U-3 rate.<\/strong> The U-3 rate defines unemployment as \u201cthose who do not have a job, those who are not actively looking for work in the prior four weeks, and those who are available for work.\u201d<\/p>\n

Unfortunately, using this definition of unemployment may put rose-colored glasses on a much graver situation.<\/p>\n

Related<\/strong>:\u00a04 Ways Coronavirus Is Rapidly Changing the Economy (& How to Navigate Rough Waters Ahead)<\/a><\/em><\/p>\n

A Case for Better Numbers<\/h2>\n

\"\"<\/p>\n

So how do you calculate\u00a0true<\/em> unemployment?<\/p>\n

First, you have to calculate the labor force<\/a>.<\/p>\n

In a super simple world, the sum of employed and unemployed people makes up the labor force. Those who have no jobs and are not looking for one are removed from these calculations. This population generally consists of students, retirees, and homemakers (more on this in a second).<\/p>\n

Therefore,\u00a0unemployment is the proportion of unemployed people in the labor force.<\/strong> Meaning they are jobless, looking for jobs, and available for work.<\/p>\n

But it\u2019s not that simple\u2026<\/p>\n

Issue #1: The U-3 Definition of Unemployment Doesn\u2019t Account for Special Situations<\/h3>\n

OK, if you define someone who is unemployed as not having a job, not actively looking for work in the prior four weeks, and currently available for work, how does this definition take into account other scenarios?<\/p>\n

    \n
  1. What about a parent who has been unemployed for three months, but hasn\u2019t been able to work due to a sick child?<\/li>\n
  2. What about a parent who is unemployed for two months, who now has to stay home to care for a child who is unable to return to school?<\/li>\n
  3. What about a parent who was laid off, contracted COVID-19, and can\u2019t look for a job since they are contagious (or worse, ill and\/or potentially infected their entire family)?<\/li>\n<\/ol>\n

    Unfortunately, these individuals would be excluded from the U-3 measure. However, they would be included in the U-6 measure of unemployment.<\/p>\n

    Issue #2: Marginal and Underutilized Workers Not Captured in the U-3 Definition<\/h3>\n

    Then there is the issue of underutilization of labor. The U-3 definition of unemployment doesn\u2019t account for those who fall into the following groups:<\/p>\n