Unemployment vs. Underemployment

The Bureau of Labor Statistics releases the results of two major surveys on the first Friday of every month (the Current Employment Statistics or CES and the Current Population Statistics or CPS). Although the amount of information in these two surveys is quite extensive, the general public is probably familiar with only a few specific metrics.

First and foremost among these is the unemployment rate, which represents the ratio of unemployed workers to the overall civilian labor force. As with anything involving the government, this simple number is more complex than it than it seems. For one thing, the BLS has no less than six different methods of calculating unemployment … and each one comes in a seasonally adjusted and unadjusted format. The standard unemployment rate — the one that makes all the headlines — is called U-3 and it is usually seasonally adjusted.

Many economists feel that U-3 is misleading because, over they years, it has slowly excluded many of the factors that used to go into how the U.S. reported unemployment. They prefer to use the “underemployment” rate or U-6, which is the BLS’s broadest measure of unemployment.

The basic definitions:

• U-3 – Total unemployed persons, as a percent of the civilian labor force (the official unemployment rate).
• U-6 – Includes those people counted by U-3, plus marginally attached workers (not looking, but want and are available for a job and have looked for work sometime in the recent past), as well as persons employed part time for economic reasons (they want and are available for full-time work but have had to settle for a part-time schedule).

Keeping all of these terms straight can be difficult for the average person, so — despite Stephen Few’s objections — I have created a pie chart that attempts to explain all of the various relationships. The central pie shows the  basic division of the working age population into the civilian labor force and people who are outside of the labor force. Each subsequent pie divides these categories into smaller and more specific subcategories. 

The calculations for U-3 and U-6 can then be represented as slices of the pie:

Right off the bat you can see that there is a problem with some of the various categories. For one thing, there is an entire group of people who are listed as Want a Job Now but aren’t working and aren’t counted as unemployed. This category includes people who have been out of work for over a year and have officially fallen out of the civilian labor force. Although the U-6 figure includes a portion of this group, many critics still feel that this practice understates unemployment.

Another way to show the calculation of the two metrics is graphically, using the color coding of the legend from the chart to show the details for each metric:

This excercise highlights another potential issue for measurement of the economy by showing the importance of the denominator (in this case, the Civilian Labor Force). Variations in this number have a tremendous effect on the outcome of both calculations. By reclassifying certain groups of unemployed (the Want a Job Now crowd), people are siphoned off from both the numerator and the denominator. The end result is a slight reduction of both the U-3 and U-6 rates. Not a big deal … unless you happen to be running for office.

Updates: