Unemployment is a hot statistic these days and new measures claiming to tell you the rate of joblessness in the country come out every other week. This week the top-line news looks good, but Ben Bernanke and others have warned that the measure of Labor Force Participation is more important. Others, like Karl Smith, think that’s nonsense.
What are all these measures of unemployment anyway, and what do they really mean?
- U3 Unemployment measures the percentage of the Labor Force who are without jobs and have actively looked for work within the past four weeks. It’s designed to measure short-term unemployment and the ‘normal’ level has historically been between 4-6%, since some people have just been fired, laid off, or quit, and others have not yet started, at any time. This measure is intended to leave off the long-term unemployed such as the very old and very young.
- There are three higher measures of unemployment than U3 also measured by the Bureau of Labor Statistics. U4 and U5 add classes of workers who have not actively sought work in four weeks, but are willing to accept work. Some of these workers have concluded there is no work for them and given up looking; others have not looked for another reason. U6, the most inclusive BLS statistic, includes all these plus those who have part-time work but desire and seek full-time work. It is said to measure ‘underemployment’ as well as unemployment. People included in U6 but not in U3 are considered likely to reenter the economy if and when it gets better, which is one reason why U6 is sometimes preferred. As you can see, the number’s different but the curve is similar.
- Besides the BLS stats, there is a measure called the Labor Force Participation Rate. It measures the total share of the population by age group that is either employed OR unemployed. It’s designed to capture the long term unemployed those with no intention of working, as separate from those that want jobs. The problem is that BLS unemployment is a percentage of the Labor Force, not the population, so by making the Labor Force less of the population, the unemployment rate will drop (at least temporarily). The shape of the curve for this measure is quite different.
DeLong‘s got what I think is the right take on this:
Jobs right now, at least as measured by the employment-to-population ratio, are no more difficult to get than they were two years ago. But two years ago the labor force participation rate stood at 65%. Now it stands at 64%. 2.4 million American adults who would have been in the labor force two years ago are not in the labor force today, even though jobs appear to be no more scarce today than they were two years ago.
I’m not totally sure about jobs being no harder to get than two years ago, but that’s a qualified statement anyway.
Bernanke’s argument that the weak LFPR is affecting the U3 rate is probably right. The danger is that, when the headline number goes down, people who are not looking for work now are going to suddenly flood the job market and drive it right back up again, causing panic etc. This is possible in the short term but I suspect, over the longer term, that the labor force participation rate will continue to fall as more and more people realize they simply don’t have marketable skills, which may have the effect of making U3 a fairly meaningless statistic.