Decoding The True Unemployment Rate

The data presented in the news of late regarding the unemployment rate keeps indicating that the unemployment situation is improving, which is really only partially correct if at all. Here is why:

The unemployment rate reported in the media (newspapers, TV, radio) is what the Bureau of Labor Statistics (BLS) calls the U-3 rate. The U-3 unemployment rate is simply the total unemployed persons, as a percent of the civilian labor force. However there are a total of 6 unemployment (U-1 through U-6) rates that are used and most people have never even heard of these rates let alone know what they mean. What I am about to propose is a look into the U-6 unemployment rate which is much more broad in what it considers “unemployed” to be.

Under the typically reported unemployment rate (U-3 number) several key groups of individuals are excluded. The first is that of “marginally attached” workers these are people who are not working nor looking for work but would take a job or have looked within the past 12 months. Let’s face it many people who are unemployed fall into this category; at last count 42% of workers have been unemployed for 6 months or longer. Most individuals reach a point at which they simply give up or take a break from searching for a job after being unemployed for an extended period of time but less than a year. So if this happens to you or someone you know they are no longer counted in the U-3 unemployment rate, as a result the rate will decrease.

If I am not counted in the U-3 unemployment number what happens to me?

When you are not counted in the U-3 unemployment number, the BLS moves you down into the “marginally attached” classifications of U-4, U-5, or U-6 unemployment rates. So as a result of being “marginally attached” you are no longer counted in the official and most recognized rate for unemployment; the U-3 number. This is the first of three ways that U-3 unemployment rate may not show a true perspective on how healthy the economy truly is.

In addition to excluding “marginally attached” individuals there is the issue of the discouraged worker. This is an individual who has been unemployed for over a year and/or is not currently looking for work because of the climate of the job market. The Great Recession as some economists have started calling it has been going on for well over 2 years. Some individuals have been unemployed for over a year if not more due to the harsh economic climate.

This may sound like a stretch but areas that relied heavily on manufacturing such as Detroit this is more common place rather than the exception. So workers out of work over a year are no longer counted in the U-3 unemployment rate but are still without work, and for up to 99 weeks collecting an unemployment check.

The last group that I would like to bring to forefront of the unemployment mystery is individuals that are now employed part time because of the economic environment but would rather be working full time; these workers are commonly referred to as being underemployed. Much like marginally attached, and discouraged workers, the underemployed are also not counted in the commonly reported U-3 number for the unemployment rate.

The following diagram illustrates the differences between the U-3 and the U-6 unemployment numbers and what is or is not included in these figures. So depending on what category a person falls into they will be counted but not necessarily in the official U-3 figure that is often talked about.

What does this all mean? Simple put the true unemployment rate is actually much higher than what it is typically reported to be. The U-6 unemployment rate includes all of the workers that are not included in the U-3 figure, that is to say individuals who are unemployed, marginally attached, discouraged and underemployed workers. Naturally this number will always be higher therefore the true number of individuals without jobs is understated by the U-3. Also the gap between the two numbers has increased dramatically since the beginning of the Great Recession indicating that individuals are without work longer and/or are working part time. The graph below illustrates the difference between the two unemployment rates.

So what does this all mean to the average person?

It means that the unemployment rate is higher than the commonly reported figure of around 9.7%, the total unemployment rate is tallied at 16.8% in July of 2010 in the U-6 versus 9.7% of the U-3. Another way to look at the unemployment picture is that instead of the 1-in-10 individuals being out of work, the figure is actually about 1-in-6 which is a huge difference when using the unemployment rate to gauge the overall economic climate.

At the end of the day the U-3 is the officially reported unemployment rate but when people talk about it and say how great or horrible it is, remember this rate does not include everyone that is out of work. Being better informed in today’s economy and understanding what the numbers given to us actually mean is ever the more critical.

All data gathered from BLS.