Meet the Author

Murat Tasci |

Research Economist

Murat Tasci

Murat Tasci is a research economist in the Research Department of the Federal Reserve Bank of Cleveland. He is primarily interested in macroeconomics and labor economics. His current work focuses on business cycles and labor markets, labor market policies, and search frictions.

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Meet the Author

Beth Mowry |

Research Assistant

Beth Mowry

Beth Mowry was formerly a research assistant in the Research Department of the Federal Reserve Bank of Cleveland. Her work focuses on labor markets and business cycles.

10.07.09

Economic Trends

Alternative Measures of the Unemployment Rate

Murat Tasci and Beth Mowry

The official unemployment rate, reported each month in the Bureau of Labor Statistics’ “Employment Situation,” is one of the most widely reported and closely watched labor statistics. The reason this indicator gets so much attention has much to do with its timeliness and the objective way in which it is defined. The rate for a given month is usually reported the first Friday of the following month. Simply defined, the official unemployment rate is the percentage of the civilian labor force that is not employed. The civilian labor force is the sum of the employed and unemployed, excluding people in the armed forces, institutionalized people such as prison inmates, and anyone under 16 years old.

While the unemployment rate is a valuable indicator of labor market stress and provides insight into the degree to which labor resources are used in the economy, no one statistic can capture all forms of labor market difficulties. The official definition of unemployment includes those who are able to work, available for work, and actively seeking work but not are currently employed. Excluded are marginally-attached workers—those who are available for and would take a job if offered but have not been looking recently—and involuntary part-time workers—those who would prefer full-time work but are instead stuck working part-time. Since these groups can provide important information about labor market slack or underutilization, the BLS publishes numerous alternative measures of unemployment in addition to the official rate each month. The alternatives range from less-inclusive to most inclusive.

Beyond the official rate, U-4 adds discouraged workers, a subset of the marginally attached, who have given up searching for jobs because they believe none are available. U-4 tends to sit just slightly above the official rate because the number of discouraged workers is apparently fairly small. U-5 adds all marginally-attached workers, or those who recently have given up the job search for a range of reasons extending beyond discouragement. These reasons, for example, could include lack of child care or transportation. The broadest measure of labor underutilization, U-6, includes people working part-time who would really like to have full-time jobs. These “underemployed” people may have had their hours cut back by employers, or perhaps they were looking for full-time work and had to settle for part-time. U-6 does not take into account people who are over-skilled for their position, such as an investment banker settling for work as a paint salesman in tough economic times.

Alternative Measures of Labor Underutilization

Measure
Current recession
2001 recession
Dec 2007
(percent)
Sept 2009
(percent)
Difference
Mar 2001
(percent)
Nov 2001
(percent)
Difference

U-3: The official unemployment rate. Total unemployed persons as a percent of the civilian labor force.

4.9
9.8
4.9
4.3
5.5
1.2

U-4: U-3 + discouraged workers

5.1
10.2
5.1
4.5
5.8
1.3

U-5: U-3 + All marginally attached workers

5.7
11.1
5.4
5.0
6.4
1.4

U-6: U-5 + Persons employed part-time for economic reasons

8.7
17.0
8.3
7.3
9.4
2.1

 

Note: Differences are given in percentage points.
Source: Bureau of Labor Statistics, Current Population Survey.

The more inclusive the measure, from U-3 to U-6, the higher the corresponding unemployment rate is. During the course of the current recession, the official rate has risen 4.9 percentage points to 9.8 percent, its highest level since June 1983. Meanwhile, U-4 has risen 5.1 percentage points to 10.2 percent, U-5 has bumped up 5.4 points to 11.1 percent, and U-6 presently sits at a whopping 17.0 percent, up 8.3 percentage points since December 2007.

Adding discouraged and all marginally-attached workers to the official rate adds only a couple of percentage points, as can be seen in the tightly-packed lower three rates above. It is not until you include involuntary part-timers that the rate really climbs up. A U-6 rate of 17.0 percent implies a considerable amount of labor market slack, or underutilized potential labor resources. As alarming as 17.0 percent sounds, this rate should be interpreted in context. While it is true that including more groups drives the rate above the official measure, differences among the rates are always present. Although the various rates sit at different levels, they track each other closely over time. In other words, the trends have generally been consistent over the past 15 years of the alternative measures’ existence. The official rate rises in recessions and declines afterward, as do the others.

The fact that the less restrictive rates have risen more in terms of percentage points than the official rate in this recession is not particularly surprising. Over the course of the 2001 recession, the official rate rose 1.2 percentage points, while U-4 rose 1.3, U-5 rose 1.4, and U-6 rose 2.1. The difference, of course, between the current situation and 2001 is the magnitude by which the rates increased. Then again, the current recession has been much more prolonged than the 11-month downturn in 2001, and how much the unemployment rate rises is largely a function of the length of a recession.

The alternative unemployment rates are important because of their implications for the course of a recovery. High rates indicate that there are many people who have given up job searching due to poor prospects, and there are many part-timers who want and need full-time employment. When economic activity begins to pick up, the official rate is likely to increase initially as the discouraged rejoin the labor force and try to find a job match. Additionally, employers usually increase the hours of part-time or existing workers before committing to a workforce expansion.

Yet another supplement to the labor picture is the employment-to-population ratio, which represents the proportion of the working-age population that is employed. Though it is less-publicized than the unemployment rate, it has the advantage of being less volatile because it is based on a larger population count rather than the labor force, which is subject to heavy seasonal variation. Furthermore, “employment” is a more clear-cut condition than “unemployment,” as evidenced by all the alternative rates. Since the population is continuously growing, changes in the employment-to-population ratio tell whether the economy is generating jobs fast enough to keep pace with the population. As of September, the ratio sits at 58.8 percent, a significant drop from its cyclical peak of 63.4 percent in December 2006 and its lowest point since January 1984.