Grasping Reality on TypePad, by Brad DeLong

David Leonhardt:

Unemployed, and Skewing the Picture: [Carroll Wright's] survey asked town assessors to estimate the number of local people out of work. Wright, however, added a crucial qualification. He wanted the assessors to count only adult men who "really want employment."... Wright is the father of the modern unemployment rate.

This Friday, the government will release the latest employment report.... Whatever the survey ends up showing, however, you can be sure of one thing: Politicians will be quick to point out that joblessness remains low by historical standards. "Five percent is still a low unemployment rate," Ed Lazear, the chairman of President Bush's Council of Economic Advisers, said recently.... Statistically, all this is true enough. But it's also deeply misleading.

Over the last few decades, there has been an enormous increase in the number of people who fall into the no man's land of the labor market that Carroll Wright created 130 years ago. These people are not employed, but they also don't fit the government's definition of the unemployed -- those who "do not have a job, have actively looked for work in the prior four weeks, and are currently available for work."

Consider this: the average unemployment rate in this decade, just above 5 percent, has been lower than in any decade since the 1960s. Yet the percentage of prime-age men (those 25 to 54 years old) who are not working has been higher than in any decade since World War II. In January, almost 13 percent of prime-age men did not hold a job, up from... just 6 percent in 1968.... [P]rime-age women.... About 27 percent of them don't hold a job today, up from 25 percent in early 2000.

There are only two possible explanations for this bizarre combination of a falling employment rate and a falling unemployment rate. The first is that there has been a big increase in the number of people not working purely by their own choice. You can think of them as the self-unemployed.... second possible explanation -- a jump in the number of people who aren't working, who aren't actively looking but who would, in fact, like to find a good job -- is less comforting. It also appears to be the more accurate explanation.

Various studies have shown that the new nonemployed are not mainly dot-com millionaires or stay-at-home dads... [but] those who have been left behind by the economic changes of the last generation... replaced by technology... gone overseas.... These nonemployed remain a distinct minority of the population. But the growth in their numbers is one reason that overall wage growth has been so weak lately.... [T]here is no doubt that the unemployment rate is a less telling measure than it once was. It's simply no longer the best barometer of the country's economic health. A truer picture can be found elsewhere, by looking at compensation growth, for instance, or to changes in the percentage of the employed...