The public might think the economic situation is not as bad as it really is if the government reported employment at 88%, rather than saying that the unemployment rate is 12%. Which phenomenon is influencing the public's judgment in this situation?

The correct answer is a framing effect

Framing Effect is the bias that describes how decision making can be affected by the way the problem is formulated or the way options are presented (framed).

Famous studies have shown that people tend to be risk averse when it comes to gains, assuming that "a bird in the hand is worth two in flight", but are prone to taking risks to avoid or compensate for losses - as maintain a losing position for the long term or even invest more, as the price falls, so that the average price becomes lower.