On the first Friday of each month, the Bureau of Labor Statistics (BLS) releases the Employment Situation, a collection of statistics that summarizes the labor market in the previous month. This month’s report yielded few surprises — and we should never look too deeply into one month’s data anyway — but the economy added 200,000 jobs in December, twice the job growth in November. The unemployment rate continued to trend down to 8.5 percent.
I thought I’d use this opportunity to delve more deeply into the unemployment rate: what it means, and how it’s measured.
The headline number, the unemployment rate, is a very specific statistic. To compute the unemployment rate, we first need to know what it means to be unemployed or employed. Skipping some of the details, a person’s labor force status can be:
- Employed: worked for pay last week.
- Unemployed: did not work for pay last week, but has looked for work in the past 4 weeks and would have been available to work.
- Out of the labor force: neither working nor unemployed.
The BLS conducts a survey of about 60,000 households, asking questions designed to elicit labor market status. The official unemployment rate, known as U3, is calculated as
This is the statistic that was reported today.
Alternative Measures of the Labor Force
U3 is a very narrow definition of what it means to be unemployed: a person must be looking for work but not working. It measures how well the labor market is finding jobs for people who are looking for them.
U3 is often criticized for not telling the whole story: there could be people who are not working, who would like to work, but for various reasons are not looking for work. To capture these people, the BLS computes measures of “labor underutilization.” In addition to being employed or unemployed, these measures allow a person’s labor force status to be:
- Marginally attached to the labor force, if a person is not currently looking for work, but would like a job, are available to work, and have looked for work sometime in the past 12 months. This category includes “discouraged workers,” people who give a job market related reason for not looking for work.
- Employed part-time for economic reasons, if the a person is working part-time because she can’t find full-time work, or if her previously full-time job has cut her hours.
With these extra definitions, we can construct U5, which includes the marginally attached as “unemployed,” and U6, which includes both the marginally attached and the involuntary part-timers as “unemployed.”
The difference between U3 and U5 is fairly small: the marginally attached workers (included the discouraged workers) isn’t the important factor. The big difference between U3 and U6 is involuntary part-time workers.
Will the Real Unemployment Rate Please Stand Up?
U6 is frequently tossed around in the media as the “real” unemployment rate. This is particularly true when someone wants to make a point about How Bad It Really Is out there: Oh, you think 8.5 percent unemployment is bad? Well the real unemployment rate is actually 15.2 percent!
It’s true that U6 is much larger than U3, but as you can see in the figure above, U6 is always greater than U3. In May 2007, U3 was 4.4 percent and U6 was 8.2 percent. Both measures of unemployment have about doubled since then; it’s important to compare apples to apples.
The U6-U3 spread, however, does show an interesting pattern. The spread is counter cyclical: it rises following the 1991 and 2001 recessions, and then declines as the economy recovers.
During the most recent recession it increased sharply, and much more so than in the previous recessions. It remains to be seen how the spread will evolve. We’ll know more in 4 weeks.
Update: The ratio of U6 to U3 looks a bit different.