How the Jobless Rate Underestimates the Economy's Problems

http://www.nytimes.com/2014/10/02/upshot/why-the-fed-needs-to-keep-fighting-to-lift-the-job-market.html?ref=economy&abt=0002&abg=1

In this article, Jared Bernstein discusses some of the ways the unemployment rate minimizes the problems in the US economy, and the importance of understanding the level of slack in the economy. Measuring the level of slack in an economy is difficult because it goes beyond the unemployment rate and attempts to measure the underutilized resources in the economy in general, as well as in the labor market specifically. It is a critical input into the Federal Reserve's decision-making process, as well as a planning tool that is used by businesses, governments, and investors in determining things such as hiring and investment. Measuring economic slack also helps Congress when adjusting temporary policy measures such as extended unemployment benefits and creating infrastructure programs.

As important as the level of slack in our economy is, most Americans do not hear about this statistic. Rather, we hear about the unemployment rate, which Bernstein argues is misleading. Every month, the BLS comes out with the unemployment rate in the US, and we celebrate as the number drops, getting closer to natural unemployment. This month, the unemployment rate reached 5.9 percent, a fact that has been touted across the news as a triumph. Many may see this statistic and believe that the economic problems in the US are a thing of the past. The truth, of course, is more complicated. What about the people working only part time jobs (who would much prefer to be working full time)? What about the people who have left the workforce due to stagnant wages or lack of viable opportunities (and who would return if the wage rate or specific job markets improved)?  The unemployment rate does not take these factors into account, and it is for these reasons that Bernstein believes that it is a misleading statistic. When these factors are taken into account, the unemployment rate would be at least 2% higher than the level at which it is currently being touted. The US economy, while on the right track, is far from fully recovered.