Labor Market May Be Softer
Than Official Statistics Show

With all that is going wrong in the U.S. economy, economists are starting to suspect that the current unemployment rate of 5.8% -- the same as six months ago -- could be underestimating the true level of distress in the labor market.

Economists disagree over what may be keeping the unemployment rate down. But at least part of the answer may have something to do with the way people are responding to the current downturn, taking steps to pull themselves out of the ranks of the unemployed even though they still don't have good, full-time jobs.

Many laid-off workers, for example, are simply setting themselves up as independent consultants operating from home offices, even though there is often little demand for their services. Setting up such consulting firms is easier than ever in part because of the Internet, which has allowed consultants to market their services to a broad audience without spending heavily on advertising. Other workers, meanwhile, are taking advantage of severance packages to take time off or head back to school. Still others are dropping out of the work force entirely, refusing to look for jobs because they have already been turned down so many times before. And some are simply opting to take what they can get, working part-time at low-wage jobs that provide some health benefits even though their search for a solid, permanent job is going nowhere.

What all these people have in common is that most of them aren't counted as "unemployed" because of the way the Labor Department crunches its numbers. Under the Department's methodology, anyone who does any work during its survey period, including part-time consultants and free-lancers, is considered employed. People are counted as unemployed, meanwhile, if they had no work at all during the survey period and attempted to find a job during the four-week period ending with the survey. Thus, people who have given up hunting for jobs and most students aren't counted as unemployed either.

The other thing all these people have in common is that their incomes are often far lower than what they were in the salad days of the late 1990s boom. That means they may not be able to contribute much to the overall economy in the months ahead, increasing the risk that the economy could languish even as its unemployment rate remains low by historical standards.

Consider Jim Stewart, 48 years old, who once earned $130,000 a year as a manager for an Internet service provider in the Boston area. After being laid off two years ago, he hunted high and low for a new job, but gave up the search six months ago to start his own consulting firm, Project Management Associates. The company provides project management training to area businesses. In setting up the company, he says he "made a mental shift" from thinking of himself as unemployed to considering himself employed. His e-mails now include a work phone number, even though it is the same as his home number.

So far, business is going well. He has picked up two clients, including Northeastern University in Boston. But he still only has enough work to occupy him for 150 hours over the next three months, and he is far from returning to his old salary. "I fully expect I can get back there," he says. Until then, he is working on a novel in his spare time.

While people like Mr. Stewart don't count as unemployed -- even though he collected unemployment benefits last year -- they do show up in some statistics kept by the Labor Department, and those numbers are worth watching to get a better read on the state of the labor market. For example, the number of self-employed workers rose 500,000 over the past year to 9.2 million. The number of people "working part-time for economic reasons" also grew by about 500,000 to 4.6 million. And the number of people who want a job but aren't looking, in many cases because they are too discouraged, rose by about 360,000 over the past year to five million.

Once all those workers are factored in, the labor market looks a good deal worse, says Mark Zandi, chief economist at Economy.com in West Chester, Pa. He believes it is more meaningful to calculate an "underemployment rate" that measures the percentage of the labor force that is less than fully employed. In March, he said, that rate ticked up to 12.4%, up from a recent low of 8.8% in April 2000.

Of course, the unemployment rate has never been a perfect measure of the labor market. But the published results do matter. For one thing, policymakers pay close attention to the unemployment rate as a proxy for the economy's health, and if they remain unusually low, there could be less urgency for Congress to act to create more economic stimulus.

Another risk is that unemployment will shoot up unexpectedly in the coming months, as more of the people who are sitting out the current cycle get desperate and resume the job search.

But even if that happened, unemployment still wouldn't be extraordinarily high by historical standards -- a fact that shouldn't be ignored, says David Resler, the chief economist at Nomura Securities in New York. While the labor market is undeniably rough for those who have lost their jobs, he says, the evidence still suggests that the labor market is better off than in most other recessions.

Write to Patrick Barta at patrick.barta@wsj.com¹

Updated April 7, 2003 2:29 a.m.