BETWEEN February and October of I96I unemployment dropped by I.8 million; this was a decline from 8. i per cent of the labor force to 5.5 per cent. Unemployment normally declines seasonally during that time of the year, but with the exception of the Korean War year of I950 this was the greatest reduction in any February-October interval in the I4 year history of the current series. Yet the official seasonal adjustment discounted the entire change in the unemployment rate as merely seasonal, and thus gave no indication of any basic improvement in the unemployment picture. By October the National Bureau of Economic Research had already designated February, 196I, as the trough of the recession, and thus there was dismay, skepticism, and considerable private debate among economists over the failure of this unemployment measure to show any improvement. (Following all three of the previous post-war recession troughs, unemployment had shown substantial improvement in the first eight months.) 1 Another ground for doubting the official estimate was the alternative residual estimate (the difference between the official seasonally adjusted figures for the labor force and employment), which showed a decline of 582,000 in the February-October interval. This I96I experience is only one of a number of cases in recent years in which the official estimate has exhibited suspect behavior, but the evidence has not been sufficiently persuasive to cause a change in method. The regression model presented here generalizes the traditional approach to seasonal adjustment of time series in order to test for and eliminate an apparent bias in that method. In the case of the unemployment series to which the model is applied, it indicates that unemployment was not stationary from February to October, I96I, but actually declined by more than one-half million on a seasonally adjusted basis, a decrease of about io per cent; this amounted to an improvement of nearly one percentage point in the idle rate. Furthermore, the direction of the bias in the official series changes course after October each year; following October, I96I it was destined to exaggerate by about one-half million any improvement through February, I962. It may be useful to summarize immediately some of the findings: (i) the test showed a systematic bias in the official series due to overadjustment at times of high unemployment and underadjustment during low unemployment; (2) the model yields two partially independent alternative estimates, both of which suggest that some of the moves in the official series have been in error by a halfmillion unemployed or more; (3) one of the two estimates essentially confirmed the residual alternative as free of the type of bias found in the official series; (4) this bias in the official series is likely to be especially misleading because of its frequent change in direction. Given the major policy significance of the unemployment rate, these findings suggest that the seasonal adjustment procedure is badly in need of an overhaul; they also cast doubt on the reliability of other volatile series adjusted by the traditional method. Section I gives a general exposition of the background and substance of the current controversy over the unemployment measure, plus * A revised version of a paper presented August 30, I96I, at the biannual meeting of the Econometric Society. The writer is grateful to Morris A. Copeland for demanding more than intuition; to Richard S. Bower, W. Duane Evans, Nicholas Georgescu-Roegen, Millard F. Long, Walter Y. Oi, Anthony M. Tang and Victor Zarnowitz for discussion and comment; and to Joseph A. Pechman and Paul A. Samuelson for encouraging further investigation of this problem. Most of the computations were done by the Vanderbilt Computer Center under a grant from the National Science Foundation. While working on the paper, the writer was the recipient of a summer research grant from the Ford Foundation. None of the above persons or organizations necessarily endorses the approach or findings. 1 The earlier unemployment estimates are also suspect, but the earlier trough dates came at a time of the year such that much less distortion occurred.