Measuring Unemployment

Unemployed Americans line up to enter aUnlike other factors of production, it’s difficult to define when and how many workers are unemployed. A weight of steel or a kilowatt hour of electricity is either employed or not. A human, on the other hand, can be classified into a whole range of categories defining his use: employed, unemployed, underemployed, discouraged, part-time or full-time just to list a few of the other classifications we use to answer the seemingly simple question of what your employment situation is.

Most countries use a method similar to that employed by the Bureau of Labor Statistics (BLS) in the United States to determine the rate of unemployment. The officially-reported, or U3, rate counts anyone without a job and who has looked for one within the last four weeks as unemployed. If you don’t have a job but haven’t been looking for one recently, you are not counted.

There are lots of good reasons to exclude the unemployed who haven’t looked for a job recently. Early retirees and stay-at-home parents are both technically “unemployed” but not in the normal sense of the word since they aren’t really looking for a job either.

At the same time, there are some workers who are not looking for work because they’ve lost hope of finding a job. Discouraged workers are important, as are those who are underemployed. The BLS constructs its U6 measure to show what the rate would be if these groups of un- or underemployed workers were accounted for.

The U6 measure might seem more appropriate than the U3 to gauge unemployment, but it too suffers some deficiencies. Not all unemployed workers who have not looked for work wither the past four weeks are discouraged – some might just be enjoying their unemployment benefits after being laid off before starting their job search.

Those underemployed workers might be part-timers searching for full-time work, but this is hardly reason to classify them as unemployed. I’m searching for a job with a seven-digit salary, but I don’t think anyone would call me underemployed. Wanting more of something than you currently have is not sufficient justification for claiming that you don’t have any at all.

Perhaps the biggest problem with unemployment statistics that use some figure of “unemployed” as the numerator and the “labour force” as the denominator is that they reflect past conditions. Someone is unemployed today because of a decision made in the past. Those searching for a job will find little solace in knowing that businesses and workers interacted in the past to create a certain unemployment rate today – they are concerned with what the conditions will be like moving forward.

At the nadir of the crisis in October 2009, the official U3 unemployment rate was 10%. While this statistic looks grim, let’s not lose sight of the fact that over 3.7 million people were hired during the previous month. Unfortunately this was outweighed by the 3.8 million people who were separated from their job. The fact of the matter is that even a seemingly high unemployment rate doesn’t mean that there are not job opportunities out there. (Though they might be part-time jobs or less than what someone had hoped for.)

Students in any intermediate macroeconomics course learn an alternative way to look at unemployment. The ratio of the percent of employed workers who are separated from their job (s) to the sum of the percents of the labor force who found or were separated from their jobs (f + s) will give the steady-state unemployment rate (SSUR).

By way of example, if 5% of workers lose their jobs each month (s = 0.05) and 50% of unemployed workers find a job (f = .5), the SSUR would be a little over 9% (0.05/0.55). We can also point to the fact that the average duration of unemployment is 2 months, and the average duration of employment is a little under two years.

The SSUR is a desirable way to talk about unemployment for two reasons.

First is that it deals with current and future labour market conditions. Unlike the unemployment rate which is backwards looking, the SSUR is computed from the actual numbers of people who find and are separated from their jobs. If these rates of hiring and separation continue, the SSUR is the unemployment rate that will obtain.

Second is that it deals with the tricky problem of identifying who really is unemployed. Unlike U3, which ignores discouraged workers, or U6, which includes some people who are not searching but are doing so of their own accord, the SSUR treats anyone who found a job as working and anyone who lost a job as unemployed. In this way the figure is much less subjective than other unemployment figures, where data is tortured and categorized in ways that might not be appropriate.

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Figure 1: American Unemployment

Figure 1 gives a look at the evolution of the American labour market over the past 14 years using the three measures of unemployment.

Unsurprisingly, the unemployment picture looks best using the U3 measure. This makes sense as the measure excludes many workers from the category of unemployed. To counter this shortcoming some commentators advocate using the more comprehensive U6 measure. To be sure, with the current rate of U6 unemployment at nearly 13%, the measurement may be more illustrative of the grim labour markets in much of the country. Still, this rate is also including many workers who are technically unemployed but potentially of their own volition.

The SSUR cuts the difference between the two rates down the middle. It is also much more volatile than the other measurements. The surge in unemployment following the crisis of 2008 peaked six months before the U3 measurement, and a full year before the U6 rate. This volatility is partly explained by the fact that it reflects actual labour conditions, in the sense that it is only actual job hires and separations that determine this rate. In a sense the SSUR shows how quickly the labour market deteriorated throughout 2008 and 2009.

Today the SSUR is hovering around 8%. It’s not such as a rosy picture as the U3 paints, but it’s quite a bit better than the U6. Notably this SSUR is the worst that America has faced in the past 14 years. The dot-com bust that led to a recession in 2001 found its bottom with an unemployment rate a hair over 8%, just like today. There has been a slow economic recovery, but the average Joe or Jill still has only as great a chance at getting a job than at the bottom of the second-worst recession of the past 30 years.

Measuring unemployment is tricky business, not least because of the passionate feelings that unused labour in the marketplace generates. Using the SSUR is a more objective and current measurement than any of the other prevailing methods. It might not tell us anything about how bad it is to be unemployed, but at least it tells us how bad the unemployment situation is.

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7 Responses to “Measuring Unemployment”

  1. David Howden says:

    Beefcake:

    one problem I have with shadowstats is that the old methodology might not be better than the new one. They get figures that are comparable over time, but it's not to say that the old way of getting the number of better than what is used now (though obviously from this article I have some pretty big concerns about the current way to get the numbers).

    If shadowstats wanted numbers that were comparable over time, it would be better to just look at labor force participation rates or similar statistics. Of course, that too is dicey because there are more women in the workforce now, few children, etc., so I have my doubts that one can really get a number to use consistently.

    The rate I give here would be a good start to get something that could be used to compare different periods, but I don't have the time/interest to get the data.

  2. Beefcake the Mighty says:

    Any thoughts on ShadowStats unemployment calculations?

  3. 1st Family Virginia says:

    Thanks, I will look forward to it.

  4. David Howden says:

    1st Family:

    I was actually just working on a second part to this analysis to give a figure similar to what you just described. Wait a week or so and it'll be posted for you to follow up on.

  5. 1st Family Virginia says:

    David:

    Another fine analysis, but your description of how the SSUR is calculated left me a little confused. Conceptually I am fine but the two paragraphs starting with "Students in any intermediate macroeconomics course learn an alternative way to look at unemployment." could use some expanding. The mechanics of the computation did not seem to match the description of the computation. Of course, I could just be a little obtuse this morning.

    Anyway, thanks again.

    • David Howden says:

      1st Family:

      I didn’t want to add the calculation to keep it simple, but it’s not very complicated so here goes:

      In the steady state, the unemployment rate (which is just the ratio of unemployed (U) workers to the total labour force (L)) will be constant. More often economists call this the natural rate of unemployment, but I don’t care for that much as it implies that there are naturally workers who don’t want to work.

      In this steady state the number of people finding a job each month must be equal to the number losing their jobs.

      The total number of workers who lose their jobs each month is the percent of workers separated (s) from the employed group (E).

      The total number of workers who find a job each month if the percent of workers who find a job (f) from the unemployed group.

      Thus, the steady state has: sE = fU

      And since the total labour force (L) is equal to the sum of unemployed (U) and employed workers (E), we can substitute E = L – U into the steady state condition and solve for the unemployment rate U/L, which is s/(s+f).

      Hope this helps.

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