How Did The Fed Conclude The Real Unemployment Rate Was 10% In January?

Last month, Fed Chair Jerome Powell calculated the unemployment rate at 10%. A reader wants to know how Powell made that determination.

Official and Alternate Rates

The official unemployment rate as calculated by the BLS is 6.3%.

On February 10, I commented Powell Says the True Unemployment Rate is Actually 10%.

In response, an economist reader asked, "where is that chart from and how did Powell produce that blue line?"

The first question is easy. I linked to Powell's speech on Getting Back to a Strong Labor Market

If you scroll down to the bottom there is a link to "View Speech Charts".

What is the Unemployment Rate?

Let's start with the basics that I am sure my reader understood. 

The Unemployment Rate = Percentage of Unemployed People in the Labor Force

UR = (# of Unemployed / Labor Force) * 100 

To be in the labor force you have to be employed or actively looking. The requirements for actively looking are strict. You have to send a resume or go on an interview. Reading Monster want ads is not sufficient. 

 From Powell's Speech

After rising to 14.8 percent in April of last year, the published unemployment rate has fallen relatively swiftly, reaching 6.3 percent in January. But published unemployment rates during COVID have dramatically understated the deterioration in the labor market. Most importantly, the pandemic has led to the largest 12-month decline in labor force participation since at least 1948. Fear of the virus and the disappearance of employment opportunities in the sectors most affected by it, such as restaurants, hotels, and entertainment venues, have led many to withdraw from the workforce. At the same time, virtual schooling has forced many parents to leave the work force to provide all-day care for their children. All told, nearly 5 million people say the pandemic prevented them from looking for work in January. In addition, the Bureau of Labor Statistics reports that many unemployed individuals have been misclassified as employed. Correcting this misclassification and counting those who have left the labor force since last February as unemployed would boost the unemployment rate to close to 10 percent in January (figure 6).

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