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Alternative Measures of the Unemployment Rate
by Tracy A Morrissette
Published Jul-24-2013

 
Unemployment statistics are among the most closely watched and most widely reported labor market numbers. These figures provide insight into the degree to which available labor resources are being utilized in the economy. While many people are familiar with the unemployment rate, in recent years the "Alternative Measures of Labor Underutilization" published by the U.S. Bureau of Labor Statistics have grown in popularity as statistics for identifying slack in the labor market. These alternative measures, commonly identified by a "U" in front of a number from 1 to 6, provide both more narrowly (U-1 and U-2) and more broadly (U-4, U-5, and U-6) defined estimates of labor underutilization than the official unemployment rate (identified as U-3).

Unemployment Defined
 
The official definition of unemployment used by BLS is all persons within the civilian noninstitutional population (CNP) who do not have a job, but are currently available for work and are actively searching for work. The CNP consists of all persons age 16 years and over, excluding those on active duty in the U.S. Armed Forces and the institutional population (e.g., prison inmates or those in homes for the aged). Unemployment is sometimes thought to include only those individuals who both qualify for and are receiving unemployment insurance benefits. However, many outside this group are considered to be unemployed based on the official definition used by BLS. Examples include those who have exhausted unemployment benefits but continue to seek work, new labor market entrants - including recent high school and college graduates - and those who are not covered by unemployment insurance, such as the formerly self-employed.

The official definition of unemployment also excludes certain groups who are sometimes thought of as being unemployed or "underemployed." Those who would like to work and have actively searched for work sometime in the last 12 months- so-called marginally attached and discouraged workers - are not counted in the official definition because they are not currently seeking work. People working part time who would prefer full-time work are also not counted as unemployed because they are working - albeit fewer hours than they would like. Finally, those who are not employed (i.e., did work for pay or profit) and do not fit the above definition of unemployed are classified as "not in the labor force."

The Unemployment Rate
 
Given the definition of unemployment, what is the unemployment rate? It is, simply put, the percentage of the civilian labor force that is unemployed. The civilian labor force is the sum of those in the CNP that are either employed or unemployed. Mathematically, the official unemployment rate is defined as:

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

Unemployment rate = (unemployed)/(civilian labor force)

Alternative Measures of Labor Underutilization
 
The BLS currently tracks six alternative measures of labor underutilization. These series are defined in Table 1.

The various measures range from very narrow to very broad definitions of "unemployed." For some data users, a more narrow definition of unemployment may be appropriate. For example, some may want to know what percentage of the labor force is in a state of long-term unemployment. On the other hand, some users would prefer a broader definition of unemployment, including discouraged workers and the underemployed. Graph 1 compares the 2011 annual averages for Oregon for the various measures given in Table 1. Not surprisingly, rates for the more narrow measures are lower than the broader measures.

The narrowest measure, U1, tracks the number of persons unemployed 15 weeks or longer as a percent of the civilian labor force. By this measure, 5.3 percent of the Oregon labor force met this criterion in 2011, compared with 9.4 percent for those unemployed for any length of time (measure U3, the official unemployment rate). The number of long-term unemployed has been elevated in Oregon and the Nation the last few years. In Oregon, U1 was within a range of 1.3 and 2.1 percent from 2005 through 2008, before peaking at 6.7 percent in 2010.

The second measure, U2, considers the percentage of job losers and persons who completed temporary jobs as a percentage of the civilian labor force. In 2011, approximately two-thirds of the official unemployment was attributed to these subsets of the unemployed. Reasons for being unemployed that are not captured by this measure of labor force underutilization include re-entrants to the labor force (e.g., a retiree who is looking for a job to earn some extra cash), new entrants to the labor force (e.g., recent high school or college graduates), or job leavers. This last group (new entrants, re-entrants, and job leavers) might be considered the "voluntarily" unemployed.

The broader measures, which the BLS has compiled for the Nation since 1994 and for States since 2003, begin by adding discouraged workers to the unemployed. Discouraged workers are defined as those who explicitly want to and are available for work and have searched for work in the prior year, even though they are not currently looking for a job because they feel their search would be in vain. If these workers are added, the measure results in only a modest increase relative to the official rate. In 2011, the official measure of the unemployment rate was 9.4 percent while the rate including discouraged workers (U4) was 9.8 percent.

Measure U5 includes not only discouraged workers but all "marginally attached workers". Marginally attached workers are defined as persons who are neither working nor looking for work but indicate that they want and are available for a job and have looked for a job sometime in the past year. This group includes those who are not currently looking for work for reasons such as lack of child care or transportation. Using this definition, 10.9 percent of the civilian labor force plus the marginally attached workers met these criteria in 2011.

Finally, the broadest measure of labor underutilization, U6, includes not only all unemployed and marginally attached persons, but also those employed part time for economic reasons. This latter group provides an objective measure of a portion of the underemployed (the so-called "involuntary part-time workers"). The BLS defines "part-time workers" as those who worked less than 35 hours during the reference week of the Current Population Survey. To be classified as employed part time for economic reasons, an individual must also be working part time because of poor business conditions or because of the inability to find full-time work and must want and be available for full-time work. Involuntary part-time employment does not capture all underemployed (such as those whose education may qualify them for a more highly skilled position). It does provide an objective measure of those who are visibly (that is, objectively classified) underemployed. In 2011, the number of involuntary part-time workers has accounted for 6.6 percent of Oregon's workforce. Using the broadest measure of labor underutilization tracked by the BLS, U6, 17.5 percent of the civilian labor force plus the marginally attached was unemployed, marginally attached to the labor force, or visibly underemployed.

Table 1
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.
   
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.
Graph 1
Alternative Measures of Labor Underutilization United States Annual Average 2012
Cautions and Conclusions
 
Often, critics suggest that the official unemployment rate understates true unemployment. In fact, since the official rate was first computed in 1940, only minor changes have been made to the definition of unemployment despite numerous outside reviews. The official measure has withstood the test of time largely because of its objectivity.

While it is true that including discouraged workers will increase the rate relative to the official unemployment rate, the difference is modest (Graph 2). In Oregon, discouraged workers made up approximately 0.2 percent of the civilian noninstitutional population aged 16 and over during 2012 (there were around 5,000 discouraged workers out of a civilian noninstitutional population of nearly 3.1 million in 2012).

A second caution involves the frame of reference used when analyzing trends over time. While analysts may argue about which measure is most appropriate to determine the amount of slack in the labor market, all measures respond in a similar fashion to the business cycle. Regardless of which measure is deemed appropriate, rates of labor underutilization have generally moved up and down together from 2008 to 2012; rising between 2008 and 2009, and generally declining after peaking in 2009. For this reason, once a given measure is selected, the frame of reference must adjust accordingly. For example, if U-6 is chosen, then the annual average rate in 2012 would be 17.2 percent, down from 20.7 percent in 2009 (Graph 3). While the rates for measure U-6 are high relative to the official definition of the unemployment rate (U-3), both U-3 and U-6 show very similar economic trends in Oregon's labor market over time.

Graph 2
Labor Force Status of the United States 2012
Graph 3
Labor Underutilization Rates U.S. Annual Averages 2008-2012