OLMIS

by Tracy A Morrissette
Published Mar-27-2012

Introduction Unemployment Defined The Unemployment Rate Alternative Measures of Labor Underutilization Cautions and Conclusions

Unemployment statistics are among the most closely watched and most widely reported numbers, yet they are frequently misunderstood and misinterpreted. Analysts monitor unemployment largely to gauge current economic conditions, providing insights into the degree to which available labor resources are used in the economy. While many people have a vague notion of what "unemployment" means, few are likely to know the precise definition, and fewer still are aware that the U.S. Bureau of Labor Statistics (BLS) publishes alternative measures of the underuse of labor. These alternative measures provide both more narrowly and more broadly defined estimates of labor underutilization than the official unemployment rate.

The official definition of unemployment used by the BLS includes anyone age 16 or older who is not institutionalized and is not currently employed, but able to work, available for work, and actively seeking work. Unemployment is sometimes thought to include only those individuals who are drawing unemployment insurance benefits. However, many outside this group are considered to be unemployed. 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, but who have stopped looking for work - so-called discouraged workers - are not counted in the official definition because they are not actively 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."

Given the definition of unemployment, what is the unemployment rate? It is, simply put, the percentage of the civilian labor force that is not employed. The civilian labor force is the sum of the employed and unemployed after excluding those under 16 years of age, institutionalized persons (e.g., prison inmates or psychiatric hospital patients), and persons on active duty in the armed forces. Mathematically, the official unemployment rate is defined as:

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

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

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.

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 unemployment rate relative to the official rate, the difference is modest (Graph 2). In Oregon, discouraged workers made up approximately 0.3 percent of the civilian noninstitutional population aged 16 and over during 2011 (there were 10,000 discouraged workers out of a civilian noninstitutional population aged 16 and over of about 3 million in 2011).

A second caution involves the frame of reference used when analyzing trends over time. While analysts may argue about which measure is most appropriate, once a given measure is selected, the frame of reference must adjust accordingly. If an individual feels that the best measure of labor underutilization should include unemployed, marginally attached, and visibly underemployed workers (U6), then the annual average rate in 2011 would be 17.5 percent, down from 20.7 percent in 2009 (Graph 3). While the rates for measure U6 are high relative to the official definition of the unemployment rate (U3), this comparison is irrelevant as a gauge of current economic conditions. Although the levels differ between these measures, the trends, which are relevant as a gauge of current economic conditions, are generally consistent from 2007 through 2011. Regardless of which measure is deemed appropriate, rates of labor underutilization rose between 2007 and 2009, and have generally declined after peaking in 2009.