THE BLOG

About "True" Unemployment

03/05/2010 06:43 pm ET | Updated May 25, 2011

AltUnempTS.png

Today's unemployment rate was announced as 9.7%. But some articles mention a "true" unemployment rate of 16.8%. How can both numbers coexist, and which is "really true"?

This is a lengthy, technical post, so here is the conclusion:

As a matter of compassion for people who would like to work more, U6 may be a more inclusive measure, but as a matter of statistical information, as a matter of understanding the economic (and political) implications of unemployment, there is no advantage in choosing anything other than the official unemployment rate, U3. Calling U6 the "true" or "real" unemployment is misleading and a disservice to readers and listeners. It is a claim of added value when in fact there is none. 

Now the details:

The Bureau of Labor Statistics produces an official unemployment statistic each month, known as U3. The BLS also produces five alternative measures of unemployment, U1, U2, U4, U5 and U6. U1 and U2 are narrower measures of long-term (over 15 weeks) and new job losses. U4-U6 are alternative measures including discouraged, marginally attached to the labor force and part-time workers who would prefer more hours. (See the BLS data here.)

As unemployment rises, the rates for marginal and part time workers also increases, and runs considerably above the official unemployment rate. The key difference is that discouraged and marginal workers are both not working and not looking for work but have looked in the last 12 months and say they would like to work. (Discouraged is a subset of marginal, with the addition that they cite a job-market related reason for not seeking work.) The part-time worker category includes currently employed people who want and are available for full time work but who have had to settle for part time employment.

Some news sources refer to U6, which includes both marginal and part-time workers as the "true" or "real" unemployment level. NPR has done so here and here and here and here. And the Washington Post's Frank Ahrens' Economy Watch Blog has had quite a bit to say about this including, here and here.

But in what sense is U6 more "true" than U5 or the official U3? One can certainly make a case that discouraged workers are unemployed, would like to work, but so disheartened they've given up. A slightly weaker case can be made for the marginal workers. But those two together only add modestly to the official unemployment rate, as you can see in the chart above. Where the big jump comes is among part-time employees, who are added to the mix in U6.

So is U6 a better measure? It certainly matters that 16.8% of potential workers would like more hours (or a job of any kind) compared to the 9.7% who are without jobs and actively looking. But if you are going to adopt U6 as your standard, you need to realize that even during the "full employment" of the late 1990s to 2000, when unemployment (i.e. U3) fell to just 3.8%, U6 still stood at 6.9%, 1.8 times higher. Of course a booming economy provides more full time job opportunities, but even the hottest economy of recent decades did not bring U6 below the 7-8 point range.

Since 1994 (when current unemployment measures were adopted) U6 has averaged 1.76 times the U3 rate. Today's ratio stands at 1.73, essentially the same as the historical average.

Today's Frank Ahren's Economy Watch entry points to the gap between U6 and U3, and links to an earlier post on that gap. Let's look at that gap, but also compare it to the ratio of U6 to U3:

U6U3DiffRatioTS.png

Ahrens focuses on the difference, which has risen lately while ignoring the ratio which has fallen over the last year, and is down from pre-recession levels. U6 rises faster than U3, with U6 increasing by about 1.7 points for each 1 point increase in U3. That means the gap between them has to rise when U3 is large, as it certainly is today. But the relative rates of U6 and U3 are the ratio, and that has fallen recently.  If you want to make the case that unemployment is "really" worse than it looks (based on U3) then U6 and the gap make a good case. But if you want to know if U6 is abnormally large given the current official unemployment of 9.7%, then the ratio is a more reasonable measure, and by that it doesn't look unusually large, and in fact is slightly below historical expectations. 

That doesn't answer the "truthiness" question, but it does seem to say that U6 isn't really telling us much we wouldn't have expected from U3 and the historical relationship. And that is the key point. Does U6 add information not available in U3? If we adopted U6, we'd have a higher rate always, but would it tell us something different from U3? Not very much at all. In the top chart, I include the correlation between U3 and U6. It is a near perfect 0.992 since 1994. That means there is only the tiniest bit of independent variation between the two series. They move up and down in near-lock-step, as is apparent just from looking at the chart. The "truth" of U6 is never much different from what we'd expect based on U3. Since 1994, U6 has never been as much as 3/4 of a percentage point different from what we'd have predicted based on U3.  Of course it contains more people (by definition it is a super-set of the official unemployed) but it doesn't vary differently over time than does U3. In short, there is virtually no added information.

We can take another peak at alternative unemployment measures, this time at the state level annually since 2005.
u1tou6.pngHere you see the rise of unemployment nationally as you read the columns right-to-left. What was a small cluster of low unemployment in the lower left corner of the 2005 column has become a wide spread throughout the plot in the 2009 column. Both U3 and each of the alternative unemployment measures have increased, which is obvious. But the relationship between the measures have remained quite stable, with correlations between .86 and .99. 

For our current interest, U6 and U3 correlate each year at the state level between .95 and .96, again leaving very little room for more information to be extracted from the U6 measure.

As a matter of compassion for people who would like to work more, U6 may be a more inclusive measure, but as a matter of statistical information, as a matter of understanding the economic (and political) implications of unemployment, there is no advantage in choosing anything other than the official unemployment rate, U3. Calling U6 the "true" or "real" unemployment is misleading and a disservice to readers and listeners. It is a claim of added value when in fact there is none. 

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