A Closer Look At Unemployment

by: Barry Ritholtz

All eyes are on Friday's NFP Report. With the markets desperately rooting for a Fed cut, especially after Wednesday's rather punk ADP Employment Report, Friday's BLS release is eagerly awaited.

In the past, I have frequently mentioned that I was not a big believer in the headline Unemployment number. Its methodology -- the Household self-reported survey -- is suspect, and it simply ignores too many people who are unemployed.

It is not that the unemployment rate is so very bad -- it's just not nearly as good as the 4.6% we have heard the BLS report.

This line of argument is often greeted by skepticism (what are you, a conspiracy theorist?).

However, what many people seem not to realize is that the source for alternative measures of unemployment comes from none other than the Bureau of Labor Statistics themselves. They actually have quite a few official measures of Unemployment -- not that you ever hear about the others.

There are actually six BLS reported measures of Unemployment. (They can be found here: Table A-12: Alternative measures of labor underutilization)

The headline number that you will hear Friday -- what BLS calls "the official unemployment rate" -- is called U3. It is defined as the "Total unemployed, as a percent of the civilian labor force."

For the mathematically inclined, that looks something like this:

Unemployment rate = (unemployed) / (employed + unemployed)

Take those termed unemployed, divide that into the civilian labor force, and you get a percentage.>


Let's look at the other measures of Unemployment BLS reports that are more inclusive than U3.

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Alternative Measures of Labor Underutilization
Measure: Definition:
U1 Persons unemployed 15 weeks or longer, as a percent of the civilian labor force
U2 Job losers and persons who completed temporary jobs, as a percent of the civilian labor force
U3 Total unemployed, as a percent of the civilian labor force (the official unemployment rate)
U4 Total unemployed plus discouraged workers, as a percent of the civilian labor force plus discouraged workers
U5 Total unemployed, plus discouraged workers, plus all other marginally attached workers as a percent of the civilian labor force plus all marginally attached workers
U6 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 (the "real world" unemployment rate)
Note: Marginally attached workers

are those who 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 marginally attached workers, have given a job-market-related reason for not currently looking 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.

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How do these various unemployment measures shake out?

U4 = 4.9%

U5 = 5.5%

U6 = 8.3%

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Here's a graphic comparison:

Alt_measures

(thanks, Oregon!)

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Now you know . . .

Sources:

Table A-12: Alternative measures of labor underutilization
BLS
http://www.bls.gov/news.release/empsit.t12.htm

Measuring Available and Underutilized Labor Resources
Federal Reserve Bank San Francisco
Economic Letter, 2000-06; March 3, 2000
http://www.frbsf.org/econrsrch/wklyltr/2000/el2000-06.html

How the Government Measures Unemployment
U.S. Department of Labor, Bureau of Labor Statistics. 1994.
Report 864 (February)
http://www.bls.gov/cps/cps_add.htm

Alternative Measures of the Unemployment Rate
Eric Moore
Oregon Employment Department, Mar-29-2006
http://www.qualityinfo.org/olmisj/ArticleReader?itemid=00000486&print=1