Alternative Measures of Labor Underutilization for Oregon

Alternative Measures of Labor Underutilization for Oregon

by Tracy Morrissette

June 2, 2017

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, 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. These groups are considered unemployed as long as they are actively seeking work.

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) *100

= (unemployed)/(civilian labor force)*100

Alternative Measures of Labor Underutilization

The BLS currently tracks the official unemployment rate and five alternative measures of labor underutilization.

The various measures range from very narrow to very broad definitions of “underutilization,” relative to the official definition of unemployment. For some data users, a more narrow definition of underutilization 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 underutilization, including discouraged workers and the underemployed. The first graph compares the 2016 annual averages for Oregon for the various measures given in the table. Not surprisingly, rates for the more narrow measures are lower than the broader measures.
The narrowest measure, U-1, tracks the number of persons unemployed 15 weeks or longer as a percent of the civilian labor force. By this measure, 1.5 percent of the Oregon labor force met this criterion in 2016, compared with 4.9 percent for those unemployed for any length of time (measure U-3, the official unemployment rate). In Oregon, U-1 was within a range of 1.3 and 1.9 percent from 2006 through 2008, before peaking at 6.7 percent in 2010. At 1.5 percent in 2016, this measure is now at a level comparable with the values immediately prior to the Great Recession.

The second measure, U-2, considers the percentage of job losers and persons who completed temporary jobs as a percentage of the civilian labor force. In 2016, approximately 47 percent 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 want a job, are available for work and have searched for work in the prior year; however they are not currently looking for a job for reasons related to the job-market. If these workers are added, the measure results in only a modest increase relative to the official rate. In 2016, the official measure of the unemployment rate was 4.9 percent while the rate including discouraged workers (U-4) was 5.2 percent.

Measure U-5 includes not only discouraged workers but all “marginally attached workers.” Marginally attached workers are defined as persons who are neither working nor currently 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, 6.0 percent of the civilian labor force plus the marginally attached workers met these criteria in 2016.

Finally, the broadest measure of labor underutilization, U-6, 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). In 2016, the number of involuntary part-time workers accounted for 4.4 percent of Oregon’s total workforce. Using the broadest measure of labor underutilization tracked by the BLS, U-6, 10.3 percent of the civilian labor force plus the marginally attached was either unemployed, marginally attached to the labor force, or underemployed.

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. In Oregon, discouraged workers made up approximately 0.2 percent of the civilian noninstitutional population aged 16 and over during 2016 (there were around 6,300 discouraged workers out of a civilian noninstitutional population of nearly 3.3 million in 2016).

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 2016; 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 2016 would be 10.3 percent, down from 20.7 percent in 2009. 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.