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US employment tutorial 6: Unemployment [ClearOnMoney]
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US employment tutorial 6: Unemployment

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Commentary

US employment tutorial 6: Unemployment

12 Jan 2010 by Jim Fickett

U-3, the standard unemployment rate, is defined as the fraction of the labor force that does not have a job and is actively looking (defined as taking action in the last 4 weeks). The 4-week restriction sometimes creates surprising results, as those who become discouraged look less actively, and are no longer counted. U-6, a broader unemployment rate that is sometimes quoted, is important for sociological issues but not for understanding the current economic trend – it is essentially a constant multiple of U-3.

We'll first get the basic definitions and a common question out of the way; then look at a more subtle point that is sometimes misunderstood.

Those unfamiliar with the technical definitions often ask common-sense questions along the lines of, “How can the number of jobs be dropping but the unemployment rate be constant?” A small part of the answer is that jobs (non-farm payrolls) and unemployment (e.g. U-3, the standard unemployment rate) come from different surveys, with different methodologies and errors. The more important part of the answer is that not all of the people without jobs are counted as unemployed.

All the unemployment statistics commonly reported are from the Bureau of Labor Statistics (BLS) in the Department of Labor. The unemployment numbers are derived from the Current Population Survey, a monthly survey of a probability sample of approximately 60,000 households, conducted by the Bureau of the Census for the BLS.

“Unemployed” does not, and should not, mean “does not have a job”. Children, stay-at-home parents, and retirees, for example, are not considered to be unemployed, because they are not looking for a job. The following definitions are meant to formalize this idea:

  • Employed (note that this includes those working Part Time for Economic Reasons – PTER): 'Persons 16 years and over in the civilian noninstitutional population who, during the reference week, (a) did any work at all (at least 1 hour) as paid employees; worked in their own [or a family] business …; and (b) all those who were not working but who had jobs or businesses from which they were temporarily absent … Excluded are persons whose only activity consisted of work around their own house (painting, repairing, or own home housework) or volunteer work'
  • Unemployed: 'Persons aged 16 years and older who had no employment during the reference week, were available for work, except for temporary illness, and had made specific efforts to find employment sometime during the 4-week period ending with the reference week.'.
  • Labor force: 'The labor force includes all persons classified as employed or unemployed'.
  • U-3 (the unemployment rate): The unemployed, as a fraction of the labor force.

So if someone gets discouraged, and goes for 5 weeks without actively looking for work, they are no longer unemployed or in the labor force; rather, they are just out of the picture. In the last two months of 2009, for example, the number of jobs decreased (US non-farm payrolls), but enough people left the labor force that the unemployment rate actually went down.

Labor force:

Unemployment (U-3):

Some commentators are scathingly critical of the 4-week clause in the unemployment definition. But in fact it is a gray area. Clearly there are borderline cases: suppose someone is 60, with some savings and pension, and she is laid off with a decent severance package. At first she looks for work, but then after a while decides just retiring might not be such a bad idea, so only looks half-heartedly, once in a while. Is she unemployed or retired? Hard to say.

As stated elsewhere, there are many interesting employment statistics that one could track, but in order to be efficient with one's time it is important to choose a small set that tells a reasonably comprehensive story, and follow it consistently. Many people, noting the issue with the 4-week cutoff on unemployment, also report (at least occasionally) on related statistics, e.g. labor force participation or the fraction of the adult population that is employed. However at a big-picture trend level, these do not tell you much beyond what you know with non-farm payrolls, unemployment, and PTER.

Now let's look at a broader measure of unemployment, called U-6. U-6 counts those who are looking for full-time work (no 4-week limit) and can't find it. More precisely:

  • Marginally attached workers: 'Persons not in the labor force who want and are available for work, and who have looked for a job sometime in the prior 12 months (or since the end of their last job if they held one within the past 12 months), but were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey.'
  • U-6: Consists of the unemployed, those working part-time for economic reasons, and the marginally attached. (For U-6 as an unemployment rate, that is the numerator; the denominator is the obvious one: the labor force plus the marginally attached.)

The marginally attached are currently a significant group. There are 2.5 million people who want a job and are looking, but have not looked in the last 4 weeks:

U-6 is perhaps not quite mainstream, but it is fairly often mentioned. I've not seen any source that tracks U-6 consistently; rather, the usual use of U-6 is to try to shock you with how bad things are: “you thought 10% unemployment was bad, but the economy is in such bad shape that really the unemployment rate is 17.5%!”

Let's be clear about what U-6 is and is not good for. If you want to know the absolute number of people who are “unemployed”, you should decide for yourself which definition – U-3, U-6 or some other one – seems right to you, and track it. If, however, you want to know where we are in the business cycle, or how bad this recession is compared to previous recessions, then use U-3, because it is commonly discussed and has a long history. U-6 adds nothing to the discussion because, with only a small margin of error, U-6 is a constant multiple of U-3 – it provides no new information on changes in the economy.

See the following reference pages for further details: