Opinion: how the unemployment rate underestimates the number of unemployed

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The Problem The state of the labor market reflects the state of the economy and, more importantly, the human cost of recessions or the benefits of booms. Consequently, the unemployment rate is one of the most observed economic statistics. But it is becoming increasingly recognized that the most frequently cited official unemployment rate overlooks many people. The problems measuring labor market slack have been particularly acute during COVID, as unemployment rates have dramatically underestimated the deterioration of the labor market, according to Federal Reserve Chairman Jerome Powell.

Using an alternative measure of unemployment offers a more complete view of labor market conditions by also including “discouraged workers” who have stopped looking for work and workers who work part-time but would like to have full-time jobs . By this measure, recessions are even more damaging to the labor market than might be concluded by considering the conventional, and more widely reported, unemployment rate. Facts The most widely reported unemployment rate is officially known as U3 unemployment and represents the number of unemployed people as a percentage of the workforce. For U3 purposes, the unemployed are defined as those who are out of work, have been actively seeking work for the past four weeks, and are currently available for work. People are considered employees if they did some paid work; This includes all part-time and temporary work, as well as full-time employment. The labor force represents the sum of the unemployed and the employed (excludes people living in institutions and active duty military personnel). The U3 unemployment rate is released on the first Friday (April 2 of this month) after the end of each month and is based on a survey of approximately 60,000 households rather than a full count of the entire population. It is calculated by the Bureau of Labor Statistics using information from the Current Population Survey conducted by the Census Bureau. Job Day Preview: US Expected to Add Nearly 700,000 Jobs in March as Economy Speeds Up Definitions of who is considered “employed” and “unemployed” for U3 purposes point to some deficiencies in the use of the U3 unemployment rate as an indicator of the overall strength of the labor market. If someone who is unemployed stops looking for work (even if they would like to have one), then they are no longer counted as unemployed, nor are they counted as part of the workforce. This “discouraged worker” contributes to a decrease in the unemployment rate because when she leaves the labor force and is no longer counted as an unemployed person, there is a proportionally greater decrease in the unemployed than in the labor force, as many more people are in the workforce than the unemployed. For example, if there are 5 unemployed in a workforce of 100 and one of the unemployed leaves the workforce, the unemployment rate goes from 5% to 4.04% (4/99 = 0.0404). The U3 unemployment rate will also not reflect a situation where someone who was working full time, and would like to continue to do so, is forced by economic conditions to work part time. This situation would not lead to any change in U3’s unemployment rate even though that person is now underemployed. An alternative measure, the U6 unemployment rate, sometimes referred to as the “underemployment rate,” offers a broader indicator of labor market underutilization. The U6 unemployment rate differs from the U3 unemployment rate in several respects. Add to the U3 definition of unemployed those who work part-time for economic reasons and workers “marginally linked to the labor force”, which is defined as those who are not working and have not looked for work in the last four weeks but have looked for work in the last 12 months. Extending the measure to include these workers makes the U6 unemployment rate higher than the U3 unemployment rate. The average unemployment rate in U6 is almost 80% higher than the official unemployment rate (U3) since 1994 (see graph). The Bureau of Labor Statistics began publishing the U6 unemployment rate in 1994. Its average value since then is 10.4%. The average official unemployment rate during this period is 5.8%. In February 2021, the official unemployment rate was 6.2% and the U6 unemployment rate was 11.1%. With a civilian workforce of around 160 million people, this translates to 17.8 million underemployed, of which 9.9 million are counted as officially unemployed, so there are around 7.9 million people who they are unemployed according to the U6 definition but are not counted as officially unemployed. by the definition of U3. The difference in unemployment rates for U6 and U3 is not constant, but tends to move with the business cycle, increasing when the economy is in recession. The gap between U6 and U3 was thought to be relatively stable, but this has not been the case in the more recent past. For example, before the Great Recession, a report from the Bureau of Labor Statistics said: “While alternative measures differ in magnitude from the official unemployment rate, they generally show very similar movements throughout the business cycle.” However, the difference between U3 and U6 has widened during each of the three recessions that have occurred since 2000: the relatively mild recession that began in the second quarter of 2001, the Great Recession that began in the first quarter of 2008 and the current recession that started in the second quarter of 2020 (see chart, gray shaded areas represent periods when the economy was in recession as determined by the National Bureau of Economic Research). This gap reached 7.6 percentage points in the second quarter of 2020, its highest value since the introduction of the U6 unemployment rate. The graph also shows that the gap between the measures narrowed during periods when the economy was strongest. The statistical analysis confirms the significant responsiveness of the difference between the unemployment rates U6 and U3 to the conditions of the economic cycle. It is well known that the U3 unemployment rate increases when the economy is operating below its maximum potential. This relationship is known as Okun’s Law. We also estimate a form of Okun’s Law for the unemployment rate U6. We find that the U6 unemployment rate is even more responsive to the economy operating below its potential than the U3 unemployment rate. More specifically, we find that a one percentage point worsening of business cycle conditions is typically associated with an increase of about 0.62 percentage points in the difference between the U6 and U3 unemployment rates. But this estimate falls short of explaining what happened in the second quarter of 2020 by a full percentage point, showing that this was a particularly tense time in the job market. It looked at economic statistics, but offers a more limited view of labor market conditions than broader indicators such as the U6 unemployment rate, which takes into account those who were forced to work part-time for economic reasons and those who left. from looking for work in the last month. . Our original research shows that the difference between these two measures of unemployment increases in an economic recession, meaning that the degree to which the conventional unemployment rate U3 underestimates labor market distress increases during a recession. As President Powell suggested in his remarks in February, this means that the official unemployment rate does not take into account the full range of labor market weakness, especially during a recession, and even more so during the current recession. This has important implications: If the decision to continue extraordinary support for people affected by this recession is based on the official unemployment rate rather than a broader measure, such as the U6 unemployment rate, then policy may not deliver. a step forward to equalize Labor market weakness marked by workers who have been forced to work part-time or who have stopped actively seeking work. This comment was originally posted by Econofact: How Weak is the Labor Market? Christopher F. Baum is professor of economics and social work at Boston College and chair of the Department of Economics. His background is in applied econometrics, public health, and financial economics. Follow him @cfbaum. Michael Klein is Professor of International Economic Affairs at the Fletcher School of Law and Diplomacy at Tufts University. His research interests include global capital markets, exchange rate management, and foreign direct investment. Follow him @MKlein