Unemployment vs. Out of Work

by Veronique de Rugy

A few days ago, Greg Mankiw posted this amusing dialogue about the unemployment rate, as if Abbott and Costello had to discuss it. Here is a tidbit of the exchange:

COSTELLO: I want to talk about the unemployment rate in America.

ABBOTT: Good “subject”. Terrible “times”. It’s about 9%.

COSTELLO: That many people are out of work?

ABBOTT: No, that’s 16%.

COSTELLO: You just said 9%.

ABBOTT: 9% Unemployed.

COSTELLO: Right 9% out of work.

ABBOTT: No, that’s 16%.

COSTELLO: Okay, so it’s 16% unemployed.

ABBOTT: No, that’s 9%…

This chart illustrates what they are talking about.

My colleague Jason Fichtner and I used data from the BLS is used to assess labor market conditions from several perspectives. The most commonly reported unemployment rate — 8.3% in January 2012 — includes the number of people without jobs who are available to work and are actively seeking work in the four weeks preceding the survey as a percentage of the labor force (the sum of employed and unemployed persons in the economy). While this official unemployment rate remains the primary measure of labor market performance, it doesn’t tell the whole story about what’s been happening in the labor market in recent years.

The base of the chart shows the official unemployment rate (U3: blue portion). Then discouraged workers (persons not currently looking for work because they believe no jobs are available for them) are added to this base as a percent of the civilian labor force, the unemployment increases slightly (U4: green portion). When all other marginally attached workers — e.g., individuals available for work but not counted as unemployed because they had not searched for work in the four weeks preceding the survey — are further added to this number as a percentage of the civilian labor, the unemployment rate number climbs yet a little higher (U5: orange portion). When the total number of people employed part-time for economic reasons (those working part time because their hours have been cut back or because they are unable to find a full-time job) are added to the total number of (i) unemployed persons, (ii) discouraged workers, and (iii) all marginally attached workers, as a percentage of the civilian labor force, the unemployment rate soars well above the official unemployment rate (U6: red portion).

This last scenario provides a more complete picture of the labor market. This alternative measure (U6) has remained above 10 percent since June 2008. Most recently, in January 2012, the reported official unemployment rate was 8.3 percent. After including the impact of discouraged workers, marginally attached workers, and those working part-time for economic reasons, the rate drastically increases to 15.1 percent, or nearly twice the official unemployment rate. During the three years prior to 2008, the official unemployment rate remained between 4.4 percent and 5.4 percent with a 1 percent fluctuation (at most) in percentage terms; the gap between the alternative rate and official rate remained under 4 percentage points.

Over at Modeled Behavior, Karl Smith makes the interesting case that we shouldn’t care that much about the decline in labor participation.