The official unemployment rate is a bad measure of the labor market in a down economy — we should think about using existing alternatives and devising some new ones.
The monthly unemployment reports from the United States Department of Labor tell us that the official unemployment rate remains stubbornly high at around 9.6%. While analysts speculate about why unemployment is high and when the rate may start to decrease, I want to ask a far more basic question, what is unemployment? Like many seemingly basic questions, the answer turns out to be more technical and complicated than it first appears.
Consider a few examples…
Person A. “I lost my job at a factory last spring, and I have been working ten hours a week at a call center and looking for something more full time.”
Person B: “After I got laid off I sent around a few resumes and asked my friends about jobs, but nobody is hiring, so I decided to stay at home to look after my daughter.”
Person C: “I was working at a hotel cleaning rooms, but business has been bad lately, so the manager told me to take unpaid time off and come back when there was more work.”
Broadly speaking, the unemployment rate is defined by the number of people that are looking for work, available for work, and not currently working, divided by the total workforce. Person A, who is working part-time but cannot find full time work would be classified as employed. Person B, who became discouraged by the lack of job prospects and ceased looking for work, would be counted as out of the workforce. Person C, who is temporarily out of work, would normally be counted as unemployed. Worth noting: the Census Bureau often reports a seasonally adjusted unemployment rate, which applies an adjustment factor to the unemployment rate to reflect month-to-month cyclical trends in the labor market (less farm work in the winter, more hotel cleaning jobs in the tourist season).
The Unemployment Rate is a Poor Measure in a Bad Economy
As the above examples illustrate, the unemployment rate masks several negative labor market trends including underemployment and discouraged workers. Because the unemployment rate is also a snapshot indicator, it cannot distinguish between short duration and longer-term (“structural”) unemployment. The unemployment rate therefore tends to dramatically minimize the true underutilization of the workforce.
This underrepresentation of labor market conditions is likely to be more pronounced during a bad economy. First, more jobs become part-time or temporary during economic downturns. Second, many people become discouraged and drop out of the labor force. Factoring in workers that are “marginally attached” or discouraged – the so-called broad measure of unemployment computed by the Labor Department makes the picture seem substantially worse. Here is a dramatic graphical illustration of how the official unemployment rate, broad unemployment, and another alternative unemployment measure have varied over time. Although the three data series fluctuate together, the rise in broad unemployment is much greater than the rise in conventional unemployment during the recent down economy.
What Might We Learn from Alternative Measures of Unemployment?
One major reason for paying attention to alternative measures of unemployment is that job loss and job creation are highly variable phenomena not only over time, but also across geographic areas and demographic groups. The unemployment statistic is thus likely to be a better measure of labor force participation for some groups than for others – for example, following job loss, white, college-educated professionals may stay in the labor force longer than black, low-educated blue collar workers. This patterning could largely be explained by local labor market conditions – workers may be more likely to drop out of the labor market in areas with high and sustained unemployment, such as Detroit, Michigan. The result is that unemployment measures mask the severity of unemployment conditions more among populations where, for various reasons, people stop looking for work or take temporary work to make ends meet.
In a 2006 paper, analysts from the Bureau of Labor statistics found that recessions had very different impacts on different demographic groups. For example, women increased their labor force participation during recessions by 2 points, while the rate edged downward for males. Labor force participation also decreased more rapidly for people over age 55. I have not yet seen any systematic analyses for the current recession, but please let me know if there are any available. (I am similarly interested in the experience in the UK and Europe).
Expanding the Unemployment Measure
There are a few ideas for how to provide more nuanced, and potentially more accurate measures of unemployment. One is to increase awareness and understanding among policymakers of the already-existing alternative measures of unemployment calculated by the Labor Department, such as U-5 and U-6 unemployment. I also think it’s also helpful to devise measures of labor market potential. A simple measure of this kind is the number of job-seekers divided by the number of job postings (there are already surveys that collect measures of hiring patterns among employers). Finally, surveys could do a better job of systematically measuring labor market discouragement. It is worth understanding why certain workers are more likely to leave the labor market – can they not find work at all? Or rather, there are jobs, but not at their desired wages? Do they think that retraining might help them more than temporary employment? How much does transportation and child care problems affect decisions to drop out of the labor force? All of these questions could be addressed with subsamples of major surveys such as the Current Population Survey, and they would greatly improve our ability to respond to unemployment in real time.