Posted: 12:19 p.m. Thursday, March 14, 2013
By Gene Marks
The calculation underlying the U.S. unemployment rate is broken. It needs to be corrected. Soon.
When I was at KPMG, a very large international accounting and consulting firm, it was (and likely still is) all about utilization. In other words: how "chargeable" employees were to the firm. Or, in other words: how productive we were. Rather: how much money we were making on behalf of those filthy-rich partners that we all aspired to be.
To calculate utilization you would take the number of hours a worker was paid for a week (typically 40) and then divide it by the number of hours worked that could be billed to the client. It's probably no surprise that many of us had utilization rates above 100 percent because we worked hours well in excess of 40 per week. Those that were below 100-percent utilized were flogged and severely beaten by our office manager. (Just kidding! The beatings were not too severe.) But in reality, if someone was less than 80-percent utilized for weeks at a time, it was evidence of a problem. And that problem sometimes had to be, well, as Delbert Grady said in The Shining: "corrected."
Grady had a point. But when it comes to the U.S. unemployment rate, the problem that needs to be "corrected" is the calculation itself. And soon. It's totally broken.
Last week it was reported that unemployment fell to 7.7 percent. You would think that would be good news. But as soon as the number was released, many experts were dismayed because labor participation also fell. Yes, there were more employed people when you only considered the people who were still actively looking for work. But what about all the other people who had been unemployed? What about the 89 million people who no longer can't be accounted for? The unemployment rate came down because these lost souls are no longer included in the calculation. In fact, some economists calculate that if those people were included in the calculation, actual unemployment would be closer to 11 percent, a number higher than when President Obama took office. So where the heck are these people?
Oh, they're working. We just don't what they're doing. Granted, some have retired and others may be lounging around hissing at Elizabeth Hasselbeck on The View. Others may have resorted to a life of crime (a better use of their time, in my opinion, than watching The View). But the great many of them are doing part-time work. Or maybe they've become small business owners themselves. Or they've become independent contractors, contributing to the phenomenal growth of outsourcing sites like Elance, oDesk, and Guru. Many have spouses that hold down jobs and get benefits through them. Others go without health insurance. This is the economy in 2013. Our economy has changed forever. Not as many people need to commute into an office anymore and hold down a 9-to-5 job. Today, a smart person can be more independent. He or she can withdraw from the "workforce" and set up shop on his or her own, charge clients what the market will bear, collect a stack of 1099s, and no longer be subject to any one boss. We're talking 89 million people. This is an enormous change.
The unemployment rate doesn't take this into consideration. It's no longer possible to figure who has a "job" or not. That needs to be changed, in order to accurately describe the employment picture in the U.S. The Bureau of Labor Statistics (BLS) needs to do what any accounting, roofing, legal, electrical, architectural, or most other service or manufacturing firms have been doing for years: it needs to look at utilization. It needs to replace the unemployment rate with a better metric. I'd call it need a utilization rate. And it's not as hard as you think.
A common myth is that the monthly unemployment uate is based on a mathematical calculation of employment data. It's not. It's based on a survey conducted by the BLS of a sample of workers and then extrapolated across the workforce. Coming up with a utilization rate would require a very similar process and could use the same survey population. It's just that different questions would need to be asked.
And the questions would replace "job" with the word "work." To determine utilization the BLS would, like KPMG and all the other firms across the country, agree on a baseline of weekly hours worked (i.e. 40). Instead of asking each person if he or she was fully employed the question to be asked is: "how many hours did you work this week in a revenue-producing activity?"
Revenue producing would need to be further defined. But think about your own life. How many hours did you spend this week that ultimately wound up producing revenue for yourself or a business? A part-time worker could easily calculate this. A person with a home-based business who makes jewelry may not have sold any products during the week, but instead spent 10 hours making products, talking to potential customers, and buying supplies that will in the end generate some type of revenue. So the time spent was revenue producing.
Connor, a friend of mine, is a good example. He lost his job as a technician a few years ago. Now he spends about 20 hours a week doing contract work for a few different information technology firms in the area. He spends another 20 hours doing the billing, administration, and collections for his wife, an optician, who runs a small business that they co-own. Connor is considered to be one of the 89 million who "no longer participates" in the labor force. But he's 100-percent utilized in some type of revenue-generating activity for himself. Revenue generating means the time spent by someone that will ultimately result in cash for that person. The amount of cash isn't important, just like the amount an employed person is paid isn't taken into consideration when calculating the current unemployment rate. It's how utilized that person is.
The biggest downside about replacing the current unemployment rate by a utilization rate is that no historical data to exists that can act as a benchmark. No one can go back into time and ask people how busy they were. So this rate won't really have any meaning until it has been consistently calculated and published for a few years and a comparison is established.
But let's jump ahead to 2023. Think about the advances in self-service technology and robotics. Will anyone be checking you out at the supermarket anymore? Will you need as many "workers" to make cars and planes? Will all those people be needed to sell, prepare, process, and ship one order? Serve hamburgers? Perform simple surgery? Of course not. Technology is replacing people. This is a fact. Today's typical "job" will be re-defined. But don't worry--people will adapt. There are always things to do and ways to make money.
So ways of measuring employment will need to adapt too. Are Americans more productive than they were in 2013? Is their utilization rate going up? Are they spending more time doing revenue-generating activities compared to 10 years ago? This is a much better way to look at the economy than determining if someone has a "job" or not. This is how millions of small business owners look at their businesses. Let's change the way the country measures employment and do it sooner rather than later to make the new numbers relevant in the future.