Tuesday, March 10, 2009

BLS | Rising Unemployment Rate Understates the Pain

Concerns are properly growing about the 8.1 percent unemployment rate reported for February and the higher rates that are on their way. But the true pain of unemployment is close to twice this rate. The Bureau of Labor Statistics routinely provides the data to report the higher rate.

The standard unemployment rate averaged 5.8 percent in 2008. A higher number of 10.5 percent takes account of three additional categories, including (1) workers who are too discouraged to look for work, (2) others "marginally attached" to the labor force, and (3) workers who have settled for part-time jobs.

Reporting the higher rate along with the standard one would help make clear why unemployment rates have been higher in much of Europe (France, Germany, Italy, for example) than in the United States. The reason, in part, is that European unemployment benefits extend longer, so workers are recorded as officially unemployed for longer. In the United States, workers settle for part-time work rather than have no job at all.

Differences among U.S. unemployment rates have been nicely summarized by Professor Jurgen Brauer of the University of Georgia at Augusta in his March blog. With his permission I am sharing his lucid exposition
Chart of BLS Unemployment Rates
by Jurgen Brauer
of the different unemployment rates. His chart at right–click on it to get a better view–shows five measures of unemployment and underemployment. Prof. Brauer explains:
The red and the light blue lines both go back to 1960; the others back to 1994. The red line is called U3 unemployment and depicts the United States’ “official” unemployment rate, averaged over the months for the respective year. In 2008, the monthly unemployment rate ranged from 4.8 percent of the civilian labor force in April to 7.1 percent in December, with an average for the year [shown in the chart] of 5.8 percent.
The red U3 line is the number that is commonly reported on a month-to-month basis, i.e., the February rate of 8.1 percent. Recession years–i.e., years when the economy has been in decline–are shown by the dashed vertical lines. Arthur Okun famously used unemployment, numbers for which are available the next month, as a predictor for GDP (which takes several months to estimate). Professor Brauer continues:
The light blue line at the bottom of the chart is called U1. This measures long-term unemployment, namely the proportion of those who are willing and able to work (i.e., people who are actively looking for work) yet nonetheless are unemployed for 16 weeks or more, that is, about 4 months or longer. U1 shows the same up and down pattern as U3, and the reason government officials track it is because it indicates long-term hardship. The other three lines are called U4, U5, and U6 unemployment, respectively, and have been tracked only since 1994.
The three lines add categories of workers who are discouraged or underemployed:
U4 adds in so-called discouraged workers, a subset of those “marginally attached” to the workforce, that is, folks who are willing and able to work but have become so discouraged about their labor market prospects that they have stopped looking for employment.
U5 adds all other marginally attached workers (those who want to work and have looked for work but whose primary reason why they are not in the workforce right now is non-job market related).
U6 rounds this out by including those who are employed part time for economic reasons, that is, they want to work full time but cannot get anything other than part time.
The U4 and U5 numbers only add about one percentage point. But U6, which includes those who say they want and are looking for full-time work but can get only part-time work, adds 3-5 percentage points. In 2008, U3 was 5.8 percent but U6 was 10.5 percent, a difference of 4.7 percentage points, nearly double.