Why Top Economists Are Citing a Higher-Than-Reported Jobless Rate

America’s official unemployment rate has declined sharply after rocketing up last year, but top government economic officials are increasingly citing a different figure — one that puts the jobless rate at nearly 10 percent, well above its official 6.3 percent reading and roughly matching its 2009 peak.

That emphasis on an alternative statistic, espoused by leaders including the Federal Reserve chair, Jerome H. Powell, and Treasury Secretary Janet Yellen, underlines both the very unusual nature of the coronavirus shock and a long-running shift in the way that economists think about weakness in the labor market.

The Bureau of Labor Statistics tallies up how many Americans are actively looking for work or are on temporary layoff midway through each month. That number, taken as a share of the civilian labor force, is reported as the official unemployment rate.

But economists have worried for years that by relying on the headline rate, they are ignoring people they shouldn’t, including would-be employees who are not applying to work because they are discouraged or waiting for the right opportunity. Looking at a more comprehensive slate of labor market measures — not just the jobless rate — came into style in a big way after the recession that stretched from 2007 to 2009.

The current conversation goes a step further. Key policymakers are all but ditching the headline unemployment rate as a reference point amid the pandemic, rather than just downplaying its comprehensiveness. That highlights the unique challenges of measuring the labor market hit from the coronavirus, and it suggests policymakers will probably be hesitant to declare victory just because the job market looks healed on the surface.

“We have an unemployment rate that, if properly measured in some sense, is really close to 10 percent,” Ms. Yellen said on CNBC Thursday. A week earlier, Mr. Powell cited the same figure in a speech about lingering labor market damage.

Mr. Powell has been clear that he adjusts the headline unemployment rate for a simple reason: It’s leaving out a whole lot of people.

“Published unemployment rates during Covid have dramatically understated the deterioration in the labor market,” Mr. Powell said during that speech. People dropped out of jobs rapidly when the economy closed, and with many restaurants, bars and hotels shut, there is nowhere for many workers who are trained in service work to apply.

Enter the new, bespoke metric. To arrive at the 10 percent figure, Fed economists are adding back two big groups.

They count those who have been misclassified as “employed but not at work” in the Labor Department’s report, but who are actually on temporarily layoff. Then they add back people who have lost work since last February and are not applying to jobs right now, so that they are officially counted as outside the labor pool.

The second group is much bigger, adding nearly three percentage points to the refurbished unemployment rate.

“What they’re trying to do with this unemployment rate is they’re saying, ‘Look, we’re not there yet,’” said Claudia Sahm, a former Fed economist who now writes columns, including for The New York Times. “It’s so heartening to see them find a way to roll it up into a statistic that people understand.”

It is unclear whether all of the people who have left jobs and are not currently looking for new ones will re-enter the labor market when the crisis ends, but the fact that policymakers are being so explicit about incorporating them into measures of labor market weakness is a subtle but important shift.

After the 2008 downturn, Ms. Yellen was the most prominent proponent of taking many measures into account when trying to judge the job market’s strength. In 2013, when she was the Fed’s vice chair, she gave a speech laying out a dashboard of data points — including a broader measure often called the “underemployment rate” — that she looked to when determining whether the job market could truly be considered strong.

But even as she emphasized a broad range of data points as vice chair and later Fed chair, headline joblessness remained the North Star for most economists, almost universally used as a gauge of how close the labor market had gotten to “full employment.” And while economists noted that the share of the population either working or applying to jobs had dropped after the financial crisis, many did not expect the figure to bounce back much.

American workers surprised them. As the economy grew steadily, people did begin to flow in from the sidelines. And thanks partly to that experience, this time around could be different.

Economic officials including Mr. Powell add the full population of people who have left the labor market since last February into their “unemployment” figure, rather than suggesting that some of those people may remain without jobs permanently.

Mr. Powell does, at times, acknowledge that it could be hard for some people who are out of work today to easily find new work if their jobs on cruise liners or casinos never come back. But he generally focuses on ways to build a bridge so that such people can find new careers — not on adjusting the Fed’s expectations so that officials accept slightly higher permanent unemployment as consistent with “full employment.”

That could matter for interest rate policy. Fed officials have been clear that they plan to leave policy rates at rock bottom — where they are set to bolster the economy — until labor market conditions match their “assessments of maximum employment” and inflation is at 2 percent and on track to exceed it for some time.

That means that even as inflation temporarily moves up this year, something that economists widely expect to happen as it is measured against very weak readings from last year, the Fed will probably look through that temporary pop, waiting to dial back monetary policy support until the job market is healthier.

Such reasoning is likely to come up when Mr. Powell testifies before Senate and House lawmakers on Tuesday and Wednesday. Longer-term yields in the bond market have moved higher as investors begin to expect higher inflation, so he could face questions about how the central bank is balancing job market worries on one hand and concerns about fueling economic excess on the other.

He’s likely to put a priority on supporting growth, as he has consistently done in recent appearances. His colleagues have joined him in playing down inflation concerns.

In fact, the more dire statistic that Mr. Powell and Ms. Yellen are using may be adding urgency to their push for continued relief, including more spending from Congress.

“Given the number of people who have lost their jobs and the likelihood that some will struggle to find work in the post-pandemic economy, achieving and sustaining maximum employment will require more than supportive monetary policy,” Mr. Powell said this month. “It will require a societywide commitment, with contributions from across government and the private sector.”

Ella Koeze, Ben Casselman and Alan Rappeport contributed reporting.