03/15/2013 01:39 pm ET Updated May 15, 2013

How to Fix the Unemployment Rate

When I was at KPMG, a very large international accounting and consulting firm, it was (and likely still is) all about utilization. Or in other words: how "chargeable" we were to the firm. Or in other words: how productive we were. Or in other words: how much money were we making on behalf of those filthy rich partners that we all aspired to be.

To calculate utilization you would take the number of hours a worker was paid for a week (typically 40) and then divide it by the number of hours worked that could be billed to the client. It's probably no surprise that many of us had utilization rates above 100 percent because we worked hours well in excess of 40 per week. Those that were below 100 percent utilized were flogged and severely beaten by our office manager. (Just kidding! The beatings were not too severe). But in reality, if someone was less than 80 percent utilized for weeks at a time, it was evidence of a problem. And that problem sometimes had to be... well, as Delbert Grady said in The Shining, "corrected."

But Grady had a point. Our country's unemployment rate calculation also needs to be "corrected." And soon.

Last week it was reported that unemployment fell to 7.7 percent. You would think that would be good news. But as soon as the number was released, many experts were dismayed because labor participation also fell. Yes, there were more employed people when you only considered all the people who were still actively looking for work. But what about all the others? What about the 89 million people who no longer can't be accounted for? Because these lost souls are no longer in the calculation, the rate has gone lower. In fact, some economists calculate that if those people who are no longer participating were included in the calculation, actual unemployment would be closer to 11 percent, a number higher than when President Obama took office. So where the heck are these people?

Oh, they're working. We just don't what they're doing. Granted, some have retired and others may be lounging around hissing at Elizabeth Hasselbeck on The View. Others may have resorted to a life of crime (a better use of their time, in my opinion, than watching The View). But the great many of them are doing part-time work. Or maybe they've become small business owners themselves. Or they've become independent contractors, contributing to the phenomenal growth of outsourcing sites like Elance, oDesk and Guru. Many have spouses that hold down jobs and get their benefits through them. Others go without health insurance.

This is the economy in 2013. Our economy has changed forever. Not as many people need to commute into an office anymore and hold down a 9-5 job. Today, a smart person can be more independent. He or she can withdraw from the workforce and setup shop on their own, charging their clients what the market will bear, collecting a stack of 1099's and no longer be subject to any one boss. This is an enormous change. We're talking 89 million people. And they can no longer be ignored.

The unemployment rate doesn't take this into consideration. That too needs to be changed if we're going to accurately describe the employment picture in our country. No longer can we figure who has a "job" or not. Instead, the Bureau of Labor Statistics (BLS) needs to do what any accounting, roofing, legal, electrical, architectural or most other service or manufacturing firms have been doing for years: it needs to look at utilization. We need to replace the Unemployment Rate a better metric. A Utilization Rate. And it's not as hard as you think.

A common myth is that the monthly Unemployment Rate is based on a mathematical calculation of actual employment data. It's not. It's based on a survey conducted by the BLS of a sample of workers and then extrapolated across the workforce. Coming up with a Utilization Rate would require a very similar process and could use the same survey population. It's just that different questions would need to be asked.

And the questions would replace "job" with the word "work." To determine utilization the BLS would, like KPMG and all the other firms across the country, agree on a baseline of weekly hours worked (i.e. 40). Instead of asking each person if they were fully employed the question to be asked is: "how many hours did you work this week in a revenue producing activity?"

Revenue producing would need to be further defined. But think about your own life. How many hours did you spend this week that ultimately wound up producing revenues for yourself or your business? A part time worker could easily calculate this. A person with a home-based business that makes jewelry may not have sold any products during the week but instead spent 10 hours making products, talking to potential customers and buying supplies that will in the end generate some type of revenue. So the time spent was revenue producing.

Connor, a friend of mine, is a good example. He lost his job as a technician a few years ago. Now he spends about 20 hours a week doing contract work for a few different information technology firms in the area. He spends another 20 hours doing the billing, administration and collections for his wife, an optician, who runs a small business. Connor is considered to be one of the 89 million who "no longer participates" in the labor force. But he's 100 percent utilized in some type of revenue generating activity for himself. Sorry, charitable work doesn't count. Revenue generating means the time spent by someone that will ultimately result in cash for that person. The amount of cash isn't important, just like the amount an employed person is paid isn't taken into consideration when calculating the Unemployment Rate. It's how utilized that person is.

The biggest downside about replacing the Unemployment Rate by the Utilization Rate is that we have no historical data to compare. We can't go back into time and ask people how busy they were. So this rate won't really have any meaning until it has been consistently calculated and published for a few years and we have something to compare it to.

But let's jump ahead to 2023. Think about the advances in self-service technology and robotics. Will anyone be checking us out at the supermarket anymore? Will we need as many "workers" to make cars and planes? Will all those people be needed to sell, prepare, process and ship that one order? Of course not. Technology is replacing people. This is a fact. Today's typical "job" will be re-defined. But don't worry -- people will adapt. There are always things to do and ways to make money.

So our ways of measuring employment will need to adapt too. Are Americans more productive than they were in 2013? Is their Utilization Rate going up? Are they spending more time doing revenue generating activities compared to ten years ago? This is a much better way to look at our economy than determining if someone has a job or not. This is how millions of small business owners look at their businesses. We need to change the way we measure employment and do it sooner rather than later if we want those numbers to be relevant to us in the future.

A version of this blog appeared in