Why Does the Number of People Collecting Unemployment Benefits Greatly Exceed the Number of People Officially Counted as Being Unemployed?

For years, I have been hearing people speculate that the official Unemployment Rate statistics are cooked for political purposes. But one little secret is that officials at the Bureau of Labor Statistics (BLS) are non-partisan and adhere to the highest professional standards. That of course, does not mean that they can’t improve their survey methods or that they don’t make errors when tabulating these numbers. However, what it does mean is that the numbers are not made up to serve anyone’s political agenda.

In our latest reading, (end of February 2021, we find that 20.1 million people are collecting unemployment benefits today. This includes the regular weekly benefits program, the individuals that are receiving extended benefits, and the number of GIG workers that normally don’t qualify for benefits but now qualify under a one-time special exception).

One Popular Question Shrouded in Mystery is How Many Individuals are Actually Unemployed?

The BLS has 6 definitions to answer that question.

U-1 – here the government defines a person as being unemployed if they are looking for a job and have been without a job for 15 weeks or longer. In Feb. 2021, the unemployment rate for this metric equaled 3.5%.

U2—here the government defines a person as being out of a job after completing a temporary job assignment and they have started looking for a job. In Feb. 2021, the unemployment rate for this metric equaled 4.1%.

U3—here the government defines a person as being unemployed if they are out of a job and have looked for a job in the past 4 weeks. This by the way, is the most popularly cited unemployment rate metric. That means that if a person is unemployed and has been too busy or was unable to look for a job in the last 4 weeks, then this individual would not be officially counted as being unemployed. In Feb. 2021, this metric equaled 6.2%.

U4- here the government simply takes the U3-metric and adds the number of individuals that were discouraged and therefore did not look for a job in the past 4 weeks but did look for a job at least once during the prior 12 months. That means that if a worker was discouraged (meaning that they would take a job if they found one) but was discouraged that they didn’t look for a job in the past 12 months, then they would not be counted in this metric as being unemployed. In Feb. 2021, this metric equaled 6.5%.

U-5 -- This metric takes the U-4 unemployment rate and adds anyone else that didn’t look for a job in the past 4 weeks but did look for one in the past year. In this category, you can capture individuals that have looked for a job in the past 12 months (and are willing to take a job if they found one) but due to other reasons haven’t recently looked (e.g., child-care issues, illness or have been taking care of a sick relative etc.) but remain ready and willing to take a job if they found one! In Feb. 2021, this metric equaled 7.3%.

U-6 – This metric takes the U-5 unemployment rate and adds the number of individuals that are working part-time because their employer is not offering them full-time employment because of economic reasons. That may mean that the employer is not in a position due to weaker demand to offer the worker longer hours. In Feb. 2021, this metric equaled 11.1%.

Which Unemployment Rate is Best Measure?

In the press, the most popular unemployment rate metrics are the U-3 and U-6 measures.

The U-3 is usually the headline figure in most business articles describing labor market conditions while those same articles often refer to the U-6 as the true barometer of underlying labor market conditions. Despite these multiple categories, all these individual metrics provide important information of the true underlying conditions of the labor market at any given point in time.

Given this background, now we can proceed to demystify the question of why we have 20.1 million people collecting Unemployment Benefits as of the end of Feb. 2021 while the two most popular measures of employment imply that we have a lower number of unemployed workers.

First, the Household Survey (used to compute the official U-3 Unemployment Rate) says we have 8.5 million more unemployed compared to pre-pandemic levels. In total, we have about 10 million unemployed individuals (if we add the number unemployed before the pandemic hit). This number is clearly lower than the 20.1 million people collecting unemployment benefits because special programs that were put in place during the Covid-19 pandemic now allow workers to collect benefits even if they have not looked for a job during the last 4 weeks (as defined by the U-3 definition of unemployment).

In contrast, the Establishment Survey (used to compute the popular monthly non-farm payroll number says we have a shortfall of 9.5 million people that are no longer being counted as being on any employer’s payrolls compared to pre-pandemic levels). Operationally, this metric takes a survey of employers and tries to capture the total number of individuals on an employer’s payroll. Unlike the U-3 measure (where a person is only counted once), if an individual held 2 or 3 jobs, then she/he would be counted multiple times in this survey.

Should we Believe, the Household Survey -8.5 Million Workers or the Establishment Survey -9.5 Million Workers?

The US Labor Dept. statistical research finds that the Establishment Survey more closely reflects movements in the U.S. economy. Therefore, we should feel more comfortable using changes in the Establishment Survey as a barometer of movements in the U.S. economy.

Still there will always be individuals that want to dig deeper to figure out why more people are collecting benefits than are counted as being unemployed using either the Household or Establishment surveys.

One very simple explanation is that there has been a lot of people that have stopped looking for a job and are content to receive total benefits that exceed their normal wages given the enhanced unemployment benefits that are being paid. This is not due to people being lazy or non-motivated. But if a person can collect an unemployment check plus an extra $300.00 (today) while previously that enhanced amount was an extra $600.00 (under the CARES Act) --- it means that they would earn more money to pay their bills by staying at home than by going to work. When a person is having a tough time making ends meet – it is hard to turn down an opportunity to support their family by staying at home and earning more than by going to work and earning less especially if going to work involves other expenses like commuting expenses and child-care costs.

Additionally, there are millions of other individuals that have stopped looking for work (and therefore not counted in the official U-3 unemployment rate) because with the closure of some child-care centers and the closure of schools --- they simply have limited options for their children and will simply need to wait until schools or child-care centers fully re-open! Only when this happens, will this cohort of workers be able to safely return to work

Undoubtedly, these issues, should clear up the mystery of why there are more people collecting unemployment benefits today than are officially being counted as unemployed using the most popularly cited U-3 measure of unemployment or any of the other labor market measures previously discussed!