Tracking the Unreported (15.6%) Unemployed

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President Barack Obama took office in January 2009 after having campaigned on the broad promise of "hope" and "change." However, to stay in office, there is one thing President Obama should hope for: an improvement in the employment picture before the 2012 elections.

The last three years have seen some of the highest unemployment rates reported since the Great Depression. The official rate moved from 5 percent in January 2008 to a high of 10.1 percent in October 2009, and a current rate of 8.6 percent. It rests 3 points above the 1948-2007 average of 5.6 percent. Unfortunately, the reality is even worse than these numbers suggest.

This is because of the way the Bureau of Labor Statistics calculates the official unemployment rate. Conceptually the unemployment rate seems simple - it is just the number of unemployed divided by the number of people in the labor force. However, deciding whom to include in the labor force is a complicated task. In the official unemployment rate, the Bureau of Labor Statistics measures the labor force as those who are employed or who have actively looked for work within the last four weeks. As a consequence, the official rate excludes workers who have decided to drop out of the labor market altogether because economic conditions have discouraged them, or for other reasons. The official rate also ignores those who settle for part-time work since they are unable to find a full-time job.

So, the way in which we calculate unemployment might mask the actual weakness of our economy. Paradoxically, if pessimism about the economy drives workers to stop looking for work or to settle for a part time job, it could actually cause the official unemployment rate to fall because of a bad outlook.

To compensate for this problem, the Bureau of Labor Statistics has published an alternative measure of the unemployment rate based on an analysis of the Current Population Survey, a household survey. This measure, referred to as the "U-6 rate", includes those that would still like a job and have looked for work in the last twelve months, not just the last four weeks. It also includes people who opted to work part-time even though they would like full-time jobs. Unfortunately, this measure is not cited nearly enough.

The U-6 rate offers a clearer picture of how precarious a situation we are in. It has moved from 8.8 percent in December 2007 to 17.4 percent in October 2009 and 15.6 percent in November 2011. Today the gap between the U-6 rate and the official rate is 7 percentage points, meaning that the number damaged by the weak job market is almost twice what the official number would suggest. At the start of the recession, there was only a 3.8 percentage point difference. By comparison, during the 2001 recession, which lasted only a few months, the difference grew by a meager 0.9 points from 3 percent to 3.9 percent.

For a historical perspective, we obtained data on these two measures going back to 1994. The evidence reveals the gap between the official rate and the U-6 rate has averaged less than 4 percentage points, and has not exceeded 5 percentage points except for the first month in 1994. October 2008 is the first time that the difference exceeded 5 points, and since then has averaged around 7 points.

Currently more than 5.7 million Americans have been unemployed for more than 27 weeks, or an astounding 43 percent of all unemployed. The tremendous increase in long-term unemployment is one factor driving the unprecedented disparity between the official measure of unemployment and the alternative measure. Long-term unemployment has a damaging psychological impact on workers' willingness to keep searching for work and motivates them to accept part-time work.

More importantly, however, long-term unemployment has a real impact on their ability to find a job because skills erode and employers tend to recoil from large gaps on a resume.

The silver lining of this bleak jobs outlook might be that more workers are settling for part-time work rather than dropping out of the labor force completely. When individuals opt for and are able to obtain part-time work, it enables them to retain their skills and, at least partly, finance their household expenses and needs. In December 2007, only 0.2 percent of the labor force was discouraged from looking for work for economic reasons. Today, the number is 0.7 percent. The percent of the labor force that is willing to settle for part-time work has grown much more, from 3 percent to 5.4 percent.

The frailty of the labor market may be a symptom of broader issues facing the economy. Trillions of dollars of spending portend an unsustainable fiscal future, and regulatory uncertainty is high. The reasonable response of businesses to higher expected tax rates and the possibility of new regulations may be to offer part-time and temporary jobs instead of hiring full-time workers. As bad policy forces businesses to seek flexibility, the chasm between the U-6 and official unemployment rates may become a permanent fixture of the economic landscape.

The main challenge facing the Obama administration is to improve the employment situation. An easy way to start is by restoring faith in the economy and providing certainty about the future in the minds of consumers and businesses. To do this, President Obama needs Benjamin Franklin's kind of "change." A penny saved is a penny earned, and today, it may also be a job saved.


American Enterprise Institute (AEI) economist and resident scholar Aparna Mathur writes about wages and taxes.  Matt Jensen is an economic researcher at AEI. 

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