Bureau of Labor Statistics and the Unemployment Rates

So I confess, I have completely made the switch to C-Span.  Last week, Janet Yellen, the Chair of the Board of Governors of the Federal Reserve, sat before the House of Representatives to talk about the current employment rate in the U.S.  She was representing in particular the Financial Stability Oversight Council (FSOC).

After listening to some of the representatives question her, I realized that I did not know the difference between the different measurements of unemployment.  The U.S. Department of Labor’s Bureau of Labor Statistics actually has six different measurements for unemployment.  The different categories are known as U-1, U-2, U-3, U-4, U-5 and U-6.

Typically on the news, reporters will cite the U-3 or U-6 statistic.  Unfortunately, they rarely include any footnotes about what these actually measure.  The statistics are not misleading in themselves, but rather the fault lies in the failure of people to understand what they mean.  The Bureau of Labor Statistics shows a chart of macroeconomic trends from January 1994 and projects them out to January 2015.  In their chart they show the evolution of the following unemployment measures: U-3 (the official unemployment measure), U-5,  and U-6.

Here are the official definitions according to the Wall Street Cheat Sheet.

  • U1 unemployment: Those who have been out of work for 15 weeks or more;
  • U2 unemployment: Those who have lost jobs or have only been able to find temporary positions;
  • U3 unemployment: Those without jobs that are available for work and actively seeking it. This is the official definition of unemployment — the one we read in the headlines;
  • U4 unemployment: U3 + “discouraged workers,” or those who have looked for jobs but feel they cannot find employment because of economic conditions;
  • U5 unemployment: U4 + “marginally attached workers,”  or those who would like to find jobs but have not looked recently;
  • U6 unemployment: U5 + part-time workers who cannot find full-time jobs for economic reasons. This is the widest definition of unemployment and gives the most accurate picture of the total number of under-employed people.

Investopedia also has an interesting article about the six measures.  They explain the use of household surveys in combination with the establishment survey to produce these numbers.  The household survey depends on a much smaller sample size, 60,000 households.  It is sometimes perceived as “volatile” but it has an important role in providing information that the establishment survey cannot.  The establishment survey collects data from 400,000 work sites, or in effect about one third of payroll workers.  Even though the establishment survey collects more data, it cannot measure other informal  or self employment.

Also, as most economists know, but surprisingly most people do not, is that as the unemployment rate decreases, inflationary pressure will rise.  Short-term interest rates will increase if there is a rise in demand for the U.S. dollar.  I wonder what will happen this time around if the global demand for the U.S. dollar does not increase as it traditionally does.  Does that mean that the typical inflationary pressures still exist, or do we experience something different?

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