The (Un)real Unemployment Rate Explained

In discussing my need for Prozac with some folks after the latest BLS Jobs numbers came out yesterday, a very legitimate question came up: If the unemployment rate is 7.3% then why does only 50.7% of the labor force have jobs? I will answer that here.

First, unemployment is measured in six different categories, known as U1 through U6. For the purposes of this discussion, I will only discuss the U3 and U6 measurements, as these are the two that most economists and market watchers use to gauge the labor market.

U3 is the simple unemployment rate. This is the one that gets reported in the news. It counts everyone who is receiving Unemployment insurance, and those who are registered with their local Department of Labor office in job-seeking activity. So you don’t have to be receiving unemployment benefits to be counted in the U3 rate as long as you’re registered with your local DOL office.

The U6 rate is known as the “Discouraged” rate. This is the U3 rate PLUS all of those who stopped receiving unemployment benefits AND stopped registering with their local DOL office to look for work, AND who are employed part time because they can’t find full time jobs. It is assumed that people stop registering with their local DOL office because they’ve “given up” looking for a job.

Right now, the U3 rate, the simple unemployment rate, those collecting benefits and registered with their DOL office is 7.3%

Right now, the U6 rate, those receiving benefits, those who are registered with their DOL office PLUS those who stopped receiving benefits, PLUS those working part time because they can’t find full time work, and those who stopped registering with their DOL office is 14.5%.

Here’s a chart of what this ratio looks like since 1994, with the Blue Line being U3 and the Red Line being U6:

U6

More on the problems of the U3 and U6 measurement in a minute.

Most economists like to look at the U6 rate because it gives them an idea of the “feelings” in the labor market (being discouraged is a “feeling”). However, more and more economists and sociologists are starting to lean toward the Labor Force Participation Rate, and the Labor Force Participation RATIO as more accurate guides (which they are).

The Labor Force Participation Rate and ratio is a measurement based on a SURVEY rather than data from government computers. The Survey is known as the Current Population Survey, and sent to a sample of all households every month (unlike economists, sociologist salivate over Surveys).

The labor force participation number is the percentage of working age adults who are actively seeking work (through any means possible) PLUS actively employed. That is currently at 63.3%. That means that 63% of all the people in the work force are either employed, or actively looking for work. After all (according to economists), if you’re actively looking for work, then you actually are “participating” in the workforce.

That means that 36.7% of working age adults don’t have jobs or aren’t looking for jobs. This is what I call the REAL unemployment number.

The chart looks something like this:

LFP

The Labor Force Participation RATIO is the number of working age adults who are employed VERSUS the number of working age adults seeking work. That ratio is currently at 58%. That means that for every TWO people looking for work, there is only ONE total person that’s actually employed.

The problems with the U3 and U6 measurements is that it only counts people receiving benefits, or registered with their local DOL office, as reported by extracting data from government computers. It doesn’t give a true picture. However, it is a reference point for government and economic policy.

As the following  chart shows, in a “near full employment” economy, such as the post World War II period, the U3 rate was under 3%. In a really good economy, the U3 rate hovers between 4 and 5%.

U3

What’s interesting to note is that the peak unemployment times ALWAYS FOLLOW the recession.

It’s important to remember that in all measurements of employment or unemployment, that it ONLY measures those within the working age categories of 16-64 years old. That helps in filtering out grandpa going back to work. However, NOT measuring older adults going back to work has its own pitfalls.

Dr. Paul Krugman Dr. Noah Smith, and Dr. Joseph Stiglitz have been staunch advocates of looking at labor force participation rates rather than U3 in making monetary policy. Dr. Stiglitz is all for eliminating the U3 and U6 measurements all together, while Dr. Krugman still sees some value in those measurements for “social” purposes.

It is through the shortcomings of statistics that most people never get a true picture of the labor market. It is also through the strength of statistical analysis that a true picture becomes possible.

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