Understanding the Unemployment Rate

Vic Napier, MBA

There is a lot of confusion about what the unemployment rate is measuring. Let’s clear a few things up. The Bureau of Labor Statistics (BLS) issues something called the Current Population Survey (CPS) every month that includes a lengthy report called the Employment Situation. The Employment Situation contains, (among many other things), Table A12 which lists six different measures of unemployment labeled U-1 through U-6. The most conservative measure is U-1, and U-6 is the most liberal.

It is important to understand that there is nothing dishonest going on; nobody is trying to hide anything. The problem is that it is getting harder to define what “unemployed” means. Obviously, someone who got laid off a week ago and is mailing resumes all over town is unemployed. But what about the woman who got laid off six months ago and decides to stay home with the kids for a while? Or the guy who just graduated from college, but looks at the job market and goes back to school for an advanced degree? Neither of these people is in the workforce, but they would be if jobs were available. They are not what we usually think of when we think of someone who is unemployed, yet they are not working.

Contrary to what most people seem to think the BLS does not define unemployment by whether or not people are receiving unemployment insurance.

“All persons who are without jobs and are actively seeking and available to work are included among the unemployed. (People on temporary layoff are included even if they do not actively seek work.) There is no requirement or question relating to unemployment insurance benefits in the monthly survey” (Employment Situation FAQ)

Instead they survey hundreds of households each month by telephone and ask people about their employment status. The final numbers reflect how people describe themselves, tempered by the following BLS definitions:

U-1 Persons unemployed 15 weeks or longer, as a percent of the civilian labor force

U-2 Job losers and persons who completed temporary jobs, as a percent of the civilian labor force

U-3 Total unemployed, as a percent of the civilian labor force (official unemployment rate)

U-4 Total unemployed plus discouraged workers, as a percent of the civilian labor force plus discouraged workers

U-5 Total unemployed, plus discouraged workers, plus all other marginally attached workers, as a percent of the civilian labor force plus all marginally attached workers

U-6 Total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all marginally attached workers

Definitions:

“Marginally attached workers” are persons who currently are neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime in the recent past.

“Discouraged workers”, a subset of the marginally attached, have given a job-market related reason for not looking currently for a job.

Persons “employed part time for economic reasons” are those who want and are available for full-time work but have had to settle for a part-time schedule.

(From Table A-12, Alternative Measures of Labor Underutilization, Employment Situation, Current Population Survey, April 3 2009)

How to Use These Numbers

There is a certain amount of ambiguity in these numbers. Unemployment is surprisingly hard to define, and no matter how those definitions are made, there always seems to be spill over from one category to another.

Economists pretty much agree that unemployment will never go below about five percent. They assume that about five percent of the population will always be “between jobs” due to business failures, firings, life changes, and other routine reasons for changing jobs.

Keeping that in mind, we can view the U-1 through U-6 figures as a continuum, with the top of the list tending to indicate the rate or speed with which the economy is losing jobs, and the bottom of the list giving an idea of how many people would be working full time if jobs were available. For example, in March 2009 U-3, (the official unemployment rate) is 8.5% so we can assume that roughly 8.5% of existing jobs would disappear in a year if nothing changed. The U-6 number for the same month is 15.6% meaning that the economy does not have enough full time jobs for 15.6% of the population.

That’s not a perfect view, but it’s a good rule of thumb guide for understanding current economic events.

By the way, during the Depression of the 30’s there was only one definition of unemployment – not having a job. By that measure the unemployment rate we now experience is on par that of the Great Depression.

Vic Napier, MBA