Today’s data about first-time claims for unemployment benefits, a key metric of the current health of the labor market, revealed the highest level of initial claims in six months.  Last week, the July jobs report showed the official unemployment rate remaining stuck at 9.5% —the 15th consecutive month above 9%.  But even those grim statistics mask the true depth of despair in the U.S. labor market.  The reason involves how the government calculates the official unemployment rate – by counting unemployment only among those currently looking for work.

Consider the following seemingly contradictory official data for the last three months:

• Total employment dropped by 495,000 – or almost 4/10ths of 1 percent.
• Yet the unemployment rate fell from 9.9% in April to 9.5% in July.

How can employment and the unemployment rate both be falling at the same time?  Because, in the last three months, 661,000 people stopped being counted as “officially” unemployed after they stopped looking for work and dropped out of the “official” labor force.  They joined literally millions of others already standing on the sidelines of the U.S. labor market who are without jobs but are nonetheless ignored in official unemployment rate data.  In fact, if the current total of 2.8 million uncounted unemployed were included in the labor force, the official unemployment rate would now be over 11%, as the chart below displays. 

Sources: January 2009 Romer/Bernstein Report (“Administration Prediction With Stimulus Plan”), actual U.S. Department of Labor data and Ways and Means Republican staff calculations of uncounted unemployed.  The “uncounted unemployed” are defined as unemployed persons not included in official unemployment rate calculations because they are not currently in the labor force, compared with the month Democrats’ stimulus passed (February 2009).  This includes people who quit looking for jobs since stimulus passed and dropped out of the labor force, plus other working-age adults who never entered the labor force, but presumably would have if the labor force participation rate was the same as when stimulus passed.