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About "True" Unemployment

Charles Franklin | March 5, 2010

Today's unemployment rate was announced as 9.7%. But some articles mention a "true" unemployment rate of 16.8%. How can both numbers coexist, and which is "really true"?

This is a lengthy, technical post, so here is the conclusion:

As a matter of compassion for people who would like to work more, U6 may be a more inclusive measure, but as a matter of statistical information, as a matter of understanding the economic (and political) implications of unemployment, there is no advantage in choosing anything other than the official unemployment rate, U3. Calling U6 the "true" or "real" unemployment is misleading and a disservice to readers and listeners. It is a claim of added value when in fact there is none.

Now the details:

The Bureau of Labor Statistics produces an official unemployment statistic each month, known as U3. The BLS also produces five alternative measures of unemployment, U1, U2, U4, U5 and U6. U1 and U2 are narrower measures of long-term (over 15 weeks) and new job losses. U4-U6 are alternative measures including discouraged, marginally attached to the labor force and part-time workers who would prefer more hours. (See the BLS data here.)

As unemployment rises, the rates for marginal and part time workers also increases, and runs considerably above the official unemployment rate. The key difference is that discouraged and marginal workers are both not working and not looking for work but have looked in the last 12 months and say they would like to work. (Discouraged is a subset of marginal, with the addition that they cite a job-market related reason for not seeking work.) The part-time worker category includes currently employed people who want and are available for full time work but who have had to settle for part time employment.

Some news sources refer to U6, which includes both marginal and part-time workers as the "true" or "real" unemployment level. NPR has done so here and here and here and here. And the Washington Post's Frank Ahrens' Economy Watch Blog has had quite a bit to say about this including, here and here.

But in what sense is U6 more "true" than U5 or the official U3? One can certainly make a case that discouraged workers are unemployed, would like to work, but so disheartened they've given up. A slightly weaker case can be made for the marginal workers. But those two together only add modestly to the official unemployment rate, as you can see in the chart above. Where the big jump comes is among part-time employees, who are added to the mix in U6.

So is U6 a better measure? It certainly matters that 16.8% of potential workers would like more hours (or a job of any kind) compared to the 9.7% who are without jobs and actively looking. But if you are going to adopt U6 as your standard, you need to realize that even during the "full employment" of the late 1990s to 2000, when unemployment (i.e. U3) fell to just 3.8%, U6 still stood at 6.9%, 1.8 times higher. Of course a booming economy provides more full time job opportunities, but even the hottest economy of recent decades did not bring U6 below the 7-8 point range.

Since 1994 (when current unemployment measures were adopted) U6 has averaged 1.76 times the U3 rate. Today's ratio stands at 1.73, essentially the same as the historical average.

Today's Frank Ahren's Economy Watch entry points to the gap between U6 and U3, and links to an earlier post on that gap. Let's look at that gap, but also compare it to the ratio of U6 to U3:

Ahrens focuses on the difference, which has risen lately while ignoring the ratio which has fallen over the last year, and is down from pre-recession levels. U6 rises faster than U3, with U6 increasing by about 1.7 points for each 1 point increase in U3. That means the gap between them has to rise when U3 is large, as it certainly is today. But the relative rates of U6 and U3 are the ratio, and that has fallen recently. If you want to make the case that unemployment is "really" worse than it looks (based on U3) then U6 and the gap make a good case. But if you want to know if U6 is abnormally large given the current official unemployment of 9.7%, then the ratio is a more reasonable measure, and by that it doesn't look unusually large, and in fact is slightly below historical expectations.

That doesn't answer the "truthiness" question, but it does seem to say that U6 isn't really telling us much we wouldn't have expected from U3 and the historical relationship. And that is the key point. Does U6 add information not available in U3? If we adopted U6, we'd have a higher rate always, but would it tell us something different from U3? Not very much at all. In the top chart, I include the correlation between U3 and U6. It is a near perfect 0.992 since 1994. That means there is only the tiniest bit of independent variation between the two series. They move up and down in near-lock-step, as is apparent just from looking at the chart. The "truth" of U6 is never much different from what we'd expect based on U3. Since 1994, U6 has never been as much as 3/4 of a percentage point different from what we'd have predicted based on U3. Of course it contains more people (by definition it is a super-set of the official unemployed) but it doesn't vary differently over time than does U3. In short, there is virtually no added information.

We can take another peak at alternative unemployment measures, this time at the state level annually since 2005.

Here you see the rise of unemployment nationally as you read the columns right-to-left. What was a small cluster of low unemployment in the lower left corner of the 2005 column has become a wide spread throughout the plot in the 2009 column. Both U3 and each of the alternative unemployment measures have increased, which is obvious. But the relationship between the measures have remained quite stable, with correlations between .86 and .99.

For our current interest, U6 and U3 correlate each year at the state level between .95 and .96, again leaving very little room for more information to be extracted from the U6 measure.

As a matter of compassion for people who would like to work more, U6 may be a more inclusive measure, but as a matter of statistical information, as a matter of understanding the economic (and political) implications of unemployment, there is no advantage in choosing anything other than the official unemployment rate, U3. Calling U6 the "true" or "real" unemployment is misleading and a disservice to readers and listeners. It is a claim of added value when in fact there is none.

By Charles Franklin | March 5, 2010 5:03 PM | Permalink | Comments (5) | TrackBacks (0)

Comments

011121:

I have to pretty strenuously disagree with you here, Professor Franklin.

The U6 is a different measure than the U3, it measures a different thing, and the thing it measures is a much better indicator for what we want to know (the health of the employment part of the economy equation) than the U6. Proving this is trivial- we could have 100% employment by the measure of the U3 and 0% employment by the U6 (if every available person were employed only half time and seeking full time wages). In such a case it should be clear that employment wouldbe critically bad, not critically good. the U6 is then the better measure.

I know you go to some lengths to point out that such a disparity has not occured. The problem is you *assume* it will not occur. That's a hell of a leap. As they say- "correlation is not causality," or if you prefer "past experience is no guarantee of future gains." Just because there has been no history of a big separation between U3 and U6 in no way means there won't be in the future. Rather than go with the measure that assumes facts not in evidence we should use the measure that actually *measures* what we want to know.

The U6 is true unemployment because, well, it is. It's the measure of the unemployment issue that includes the best data. The fact that U6 is at 16% and U3 is at 9% has meaning. The latter measure falsely suggests we have less than 10% of our population in the dire straits of un or underemployment. The latter reflects how dire the situation actually is. We have to re-adjust our expectations and not compare U6 to U3 historical data of course, but the U6 is simply a superior measure.

Posted on March 7, 2010 8:51 PM

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AySz88:

@011121 - I think you've been missing the point here. There are already (currently) people citing U6 as a Big Scary Number, as if it unmasks some sort of hidden economic deficiency that has suddenly been revealed that'd would be missed if you were to just use U3. I speculate that this is almost certainly just for political gain, since peoples' expectations surely have not been "re-adjusted" yet.

It would be much wiser to switch this convention during good times, since it would be much harder to spin for political purposes.

Posted on March 7, 2010 10:11 PM

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Joe Daniels:

If you truly want to know consider the entire population that is not gainfully employed, then U6 is the data to consider.

How do you take into consideration the many workers who are freelancers and independents (Limited Liability Corporations) who are self "unemployed?" I suppose we need another "U" graph!

Posted on March 7, 2010 11:28 PM

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011121:

"There are already (currently) people citing U6 as a Big Scary Number, as if it unmasks some sort of hidden economic deficiency that has suddenly been revealed that'd would be missed if you were to just use U3."

But that's exactly what it does do- it unmasks that the unemployment picture is far worse than the 9% number suggests because- well it IS far worse than the 9% number suggests. Over a seventh of our working population is not getting the hours they want/need. That's quite different than saying less than a tenth has that problem.

I don't disagree with you that some people will try to use the U6 number for political gain but the flip side is that others are trying to use the U3 number for the same reason. rather than worry about who wins or who loses let's use the most accurate indicator we can, which is the definitively the U6.

Posted on March 8, 2010 4:08 PM

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AySz88:

The whole point of this article by Franklin is that there is ***NOT*** currently anything new in looking at U6 for the whole time series, vs. looking at U3 all the time. The unemployment situation is ***NOT*** far worse than what the "9%" number suggests, because we are already attuned to what "9%" actually manifests as in the job market ("really bad"). And note that same "really bad" is the exact thing as what "16% U6" means, manifested in the job market, because U3 and U6 are locked in tandem with each other. The numbers are just scaled differently, but you can basically derive one from the other and get the same understanding of the real-world situation either way - with U3 and U6 so tightly correlated, it's much like squabbling over the difference between "1:1 male-female ratio" vs "1/2 male".

But by bringing up U6 now, you create the problem that people are comparing U6 numbers on a U3 gauge - 9% is really bad, but 16% sounds incredulously so, even though "9% U3" means exactly the same thing as "16% U6". In other words, citing "16% 'real' unemployment" causes people, generally hooked on U3, to interpret that 16% number as Depression-esque, which is ***NOT*** an accurate indicator of what the job market looks like.

Posted on March 9, 2010 10:27 PM

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