February 24, 2015

The Official Unemployment Rate Isn’t the Complete Picture

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This week’s chart is an updated comparison of the different measurements of the unemployment rate from the Bureau of Labor Statistics (BLS). It includes new data on the official and alternative unemployment measurements for January 2015. The widely reported official unemployment rate, which remains the primary measure of labor market performance, is not the most realistic representation of the current state of the economy, because it fails to capture, among other things, individuals who have simply stopped looking for work. The limited perspective on the labor market offered by the official unemployment rate is readily apparent when compared to alternative measures of unemployment.

The chart displays the official unemployment rate, or U3 unemployment rate, alongside various alternative measures from 2005 to the most recent data in January 2015.

The most commonly reported unemployment rate—5.7 percent in January 2015—is defined as 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). At first glimpse, the 5.7 percent official US unemployment rate appears to be good news. Indeed, the early data show that the economy did add 257,000 jobs in January.

However, the official U3 number, represented as the blue area on the chart above, can be compared to the number of workers who are “officially” unemployed plus those categorized as “discouraged workers,” known as U4 unemployment. This is represented by the light blue portion of the graph. Discouraged workers are people who are able to work but cease searching for employment because they believe that no job opportunities exist for them. As of January 2015, the U4 unemployment rate was 6.1 percent, increasing by 0.1 percentage points from December 2014, the same increase as the official U3 unemployment rate. We would expect the U4 unemployment rate to decrease in healthy economic times as more workers have faith that they can find gainful employment. The U4 unemployment rate has not significantly decreased relative to the official U3 rate since the onset of the recent recession, suggesting persistent structural barriers to employment.

Next, we can consider marginally attached workers with the U5 unemployment rate, represented as the orange portion on the graph. The BLS defines this group as persons who want and are available for work but who are not counted as unemployed under the official U3 measurement because they had not actively searched for work in the four weeks preceding the BLS survey. The U5 rate adds marginally attached workers to their measures of officially unemployed and discouraged workers. In December 2014, the U5 unemployment rate was 7.0 percent, rising by 0.1 percentage points from the month before.

Finally, it is important to consider workers who are “underemployed.” This is represented by a final alternative measurement called the U6 unemployment rate, which adds part-time workers for economic reasons. Shown as the red portion on the graph above and totaling 11.3 percent in January 2015, it is considerably higher than the official unemployment rate and has risen by 0.1 from December 2014. This final measure provides the broadest picture of the current labor situation. At twice the official U3 unemployment rate, it has slightly declined since the onset of the recession but is still significantly higher than pre-recession range of 8–9.3 percent from 2005 to 2007.

Much of the decrease in the U3 unemployment rate is due to a decrease in the labor force participation rate—that is, fewer people of working age working or looking for work. If the labor force participation rate in January 2015 were the same as that in January 2014, the official U3 unemployment rate would be 5.8 percent. Adding in the alternative unemployment measures provides even less cause for optimism.

This chart shows that many workers who do not fit the narrow criteria of the official unemployment measurement have struggled to find employment for years with limited success. It is important to remember these critical labor demographics in assessing the complete unemployment picture in the United States and in beginning a broader discussion about the institutional and other barriers to creating jobs.