Mitchell Upp
Labor Economics
10 May 2013
Which Unemployment Rate?
Every first Friday of the month, the Bureau of Labor Statistics releases their figures on
the national unemployment rate. The most recent unemployment rate reported was 7.5%
(BLS). However, what most people do not know is that the Bureau of Labor Statistics does not
release just one unemployment rate, but six of them, all using slightly different measures for
unemployment. They are labeled U-1 through U-6. Each extra level adds another group to the
unemployed category, which makes U-1 the lowest and U-6 the highest. Since they all show a
slightly different angle on unemployment, they can be used to get a more accurate gauge on
what is happening in the economy. Currently, the BLS uses U-3 as the “official” unemployment
rate. This is the number that most people are referring to when they talk about the
unemployment rate. But why use U-3 over the other five measures? In this paper, I will discuss
and compare all six measures that the BLS reports, and analyze which should be considered the
most important measure of the state of the economy.
According to the Bureau of Labor Statistics, U-1 consists of all “persons unemployed 15
weeks or longer, as a percent of the civilian labor force.” (BLS) This means that people are not
measured in the U-1 unemployment rate until they have been out of work for at least 15
weeks. The BLS uses U-1 to eliminate frictional unemployment from the unemployment rate.
Frictional unemployment is unemployment caused by things such as switching careers, moving
to another state, and other things that cause only a short time of unemployment. Generally
speaking, frictional unemployment is not considered a major issue, since it is very temporary in
nature. By only counting people that have been unemployed for more than 15 weeks, U-1 only
shows the people that have been unemployed long enough to show that they are not going
through a short transition stage. Therefore, U-1 can be a very good measure of economic
wellbeing.
U-2 consists of U-1 plus “job losers and persons who completed temporary jobs, as a
percent of the civilian labor force.” (BLS) This means that it adds people that were laid off, fired,
or finished a temporary job and are now unemployed again. This makes it slightly broader than
the U-1 rate, but still leaves out frictional unemployment. However, by adding those who
involuntarily stopped working or finished temporary work, U-2 counts people that would
normally not be counted in U-1 since they have not been unemployed for more than 15 weeks
yet. Since these people did not voluntarily quit, they are unlikely to have another job lined up,
and will likely be unemployed for more than 15 weeks. U-2 begins to preemptively count these
people.
U-3 is considered the “standard” unemployment rate. It consists of “total unemployed,
as a percent of the civilian labor force.” (BLS) In this definition people are considered
unemployed if they are over 16 years of age, not institutionalized (i.e. incarcerated or in a
mental hospital), and have looked for work in the last four weeks. This is more broad than U-2,
since it counts people as unemployed no matter how short of a time they have been out of
work. However, the final clause in the definition is an interesting issue. Since people have to
look for work in the last four weeks in order to be counted as unemployed, it is possible – and
rather common – for people to give up on finding work. These people are known as
“discouraged workers” since they have been discouraged by being unable to find work. By
giving up for more than four weeks, they effectively “fall out” of the unemployment rate.
Because of this, U-3 tends to understate the actual level of unemployment. However, since it is
in the middle of the U-1 to U-6 scale, it tends to be around the average of all six values. This is a
possible reason why the Bureau of Labor Statistics uses U-3 as the official unemployment rate.
U-4 consists of U-3 plus “discouraged workers, as a percent of the civilian labor force
plus discouraged workers.” (BLS) U-4 attempts to measure the discouraged workers left out of
the U-3 measurement. Since discouraged workers are obviously still unemployed since they
are not working, U-4 is a useful measure to gauge economic well-being. U-4 will always be
higher than U-3, but what is most important it the gap between U-3 and U-4. When the gap is
small, then there are few people that have given up on trying to find work. When the gap is
larger, such as how it was during the recent recession, it means that more people are
unemployed for longer periods of time, and will not likely be getting jobs soon since they are no
longer looking for work.
U-5 consists of U-4 plus “all other marginally attached workers, as a percent of the
civilian labor force plus all marginally attached workers.” (BLS) This category adds people
“marginally attached to the work force.” While discouraged workers are people that have not
looked for work because they have lost hope for finding a job, marginally attached workers are
people that have stopped looking for work for any reason. A person is considered marginally
attached for a year after they stop looking for work. Because of this, there are any number of
reasons why a person would be classified as marginally attached, such as dropping out of the
labor force entirely.
U-6 is the broadest of all the unemployment measures. It consists of U-5 “plus total
employed part time for economic reasons, as a percent of the civilian labor force plus all
marginally attached workers.” (BLS) This adds people that are “underemployed” to the
unemployment rate. These are people that currently have part-time jobs, but actually want
full-time jobs and are unable to find full-time employment. This is a very broad group, and
because of this, U-6 tends to be quite high. In addition, underemployment is less of an issue
than total unemployment, so it is not a major focus for policymakers. They tend to be more
focused with unemployment.
All of these categories have their merits, but they all have disadvantages as well. All of
them either include groups that make the measure too broad or leave out groups that make
them too narrow. In order to get a more exact measure of unemployment and focus on the
most important issues, I propose that a new unemployment rate should be implemented that
takes the best parts of all six unemployment rates.
The current official unemployment rate – U-3 – is misleading because it leaves out
discouraged workers. It is currently too easy to leave the U-3 category since workers stop being
counted after a short four weeks of not looking for work. Clearly discouraged workers are an
important measure of economic well-being, and should be counted in the new official
unemployment rate.
U-1 has a major strength in that it leaves out frictionally unemployed workers. Since this
is considered “normal” unemployment because it occurs even in a perfectly healthy economy.
People that find a job within 15 weeks of leaving their old job are not a concern for economists,
since they readjust and enter the labor force again so quickly. In the new official unemployment
rate, only people unemployed for more than 15 weeks should be counted.
U-2 adds those that involuntarily left and those that completed temporary work to the
unemployment rate. Of the two, I think that only those that involuntarily left should be added
to the new official unemployment rate. I think this because measuring the number of people
that are laid off is more important than measuring those that are unemployed because their
temporary work ran out. While temporary work (such as seasonal work during Christmas time)
is part of a normal and healthy economy, large numbers of layoffs are not. Because of this,
people that have been laid off should be measured in the new official unemployment rate.
U-6 is too broad because it adds underemployed people to the unemployment rate.
Underemployment is a valid concern, but it is a smaller issue than total unemployment.
Likewise, U-5 is also broad because it adds marginally attached workers. This is a very large
category, and there are too many reasons workers can be classified as marginally attached for
U-5 to be as useful as the others. In the new official unemployment rate, both underemployed
and marginally attached workers should be left out.
Using these restrictions, the new official unemployment rate would consist of these
things:
1) People unemployed for more than 15 weeks.
2) “Discouraged workers”, or those that have given up looking for work for more than 4
weeks because they do not believe there are jobs to be found.
3) People that have been laid off, even if they have been unemployed for less than 15
weeks.
Using these three criteria, the most important measures of unemployment will have an effect
in calculating the unemployment rate. By removing frictionally unemployed workers, the
percentage should be lower than the U-3 rate. Adding discouraged workers would raise the
percentage, and so would adding those that are laid off.
This measure has some advantages over the U-3 rating. One of these is the idea of a
“natural rate of unemployment.” This is the idea that some unemployment will always be
present, even in a perfect economy. Because of this, the optimal unemployment rate using the
U-3 measure is somewhere between 4.8% and 6.7% (FRBSF). This is due to frictionally
unemployed workers and structurally unemployed workers, or those that do not have any
marketable skills. In a perfect world, structural unemployment would last only a short time
while the worker repurposed his skills into something the market can use.
Unlike the U-3 measure, the new official unemployment rate would have a natural rate
of unemployment equal to 0%. Since the new measure already removes frictionally
unemployed workers, they do not affect the natural rate. In addition, structurally unemployed
workers would only be counted if gaining new skills takes more than 15 weeks. By removing
these from the measure, the natural unemployment rate would be 0%. This avoids the issues
with the current U-3 rate, which has an ambiguous natural rate of unemployment and tends to
change with the current outlook of the economy.
Another advantage is that unemployment will not be understated by ignoring
discouraged workers. This is a serious problem with the U-3 rate, since the unemployment rate
can appear to go down by more people giving up on finding work, which is obviously worse for
the economy. By measuring these workers, unemployment will not drop due to technicalities in
the definition of unemployment.
Using this new measure of unemployment, the issues associated with the “standard”
unemployment rate would be solved. It would provide a more accurate picture of
unemployment and economic well-being. It also clears up ambiguity with the natural rate of
unemployment and avoids understating unemployment due to discouraged workers.
Works Cited
"Alternative Measures of Labor Underutilization for States." U.S. Bureau of Labor Statistics.
U.S. Bureau of Labor Statistics, n.d. Web. 08 May 2013.
<http://www.bls.gov/lau/stalt.htm>.
"FRBSF Economic Letter: What Is the New Normal Unemployment Rate? (2011-05,
2/14/2011)." FRBSF. Federal Reserve Bank of San Francisco, n.d. Web. 08 May 2013.
<http://www.frbsf.org/publications/economics/letter/2011/el2011-05.html>.