June 2009 No.2
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Articles:
Expanding the Labor Market Analysis Toolkit: Mapping and Disaster
Assessment
Looking Beyond the Official Unemployment
Statistics: Alternative Measures of Labor
Underutilization
Looking Beyond the Official Unemployment Statistics:
Alternative Measures of Labor Underutilization
As the economy continues to worsen, both the general public and policy makers have shown renewed interest about who is and is not included in the official unemployment statistics. Questions have also been raised as to whether the official unemployment rate is the best indicator to measure the impact of the economic recession. This article will discuss who is included in the offi cial unemployment statistics and also present alternative measures of labor underutilization, published by the U.S. Bureau of Labor Statistics (BLS), which can enhance our analysis of the labor force.
Who is Officially Counted as Employed and Unemployed?
The national unemployment rate is developed from a monthly survey of about 60,000 households conducted by the U.S. Census Bureau for the BLS, known as the Current Population Survey (CPS). Each member of the household who is at least 16 years old is classified into one of three categories: employed, unemployed or not in the labor force.
The employed include anyone who did work as paid employees, worked in their own business or was temporarily away from work due to reasons such as illness, vacation or a labor dispute. Those who worked at least 15 unpaid hours in a family business or enterprise are also counted as employed. Individuals who are employed at least 35 hours per week are considered full-time workers. The employed also include those who are working part-time
for economic reasons.
The unemployed include anyone who is without a job but is available and actively looking for work sometime during the four-weeks prior to the period they are surveyed. The job search must include specifi c behavior that demonstrates the person is actively looking for work, such as participating in job interviews or job fairs. An active job search does not include what are considered to be passive types of behavior such as browsing job advertisements. Those who are on layoff but expecting to be recalled by their employer do not need to look for work to be counted as unemployed. Unemployed is further broken down by reasons for unemployment including: job losers (both permanent and temporary), persons who completed temporary jobs, job leavers and labor force reentrants and new entrants. Also, it is important to note that one does not need to be collecting Unemployment Insurance benefits to beclassifi ed as unemployed.
The labor force is defined as the sum of employed and unemployed. The unemployment rate is the number of unemployed, expressed as a percentage of the labor force (or unemployed/labor force x 100).
People Not Counted as Employed or Unemployed
Those who are neither classifi ed as employed nor unemployed are considered to be not in the labor force. The most common examples of people outside the labor force are retirees, students and homemakers. However, there is also a category of people who are classified as marginally attached to the labor force. These individuals want a job, are available for work but have stopped looking for work due to reasons such as child care problems,
school, family responsibilities or lack of transportation. One must also have looked for work sometime during the previous 12 months to be classified as marginally attached to the labor force.
Discouraged workers are a sub-group of those marginally attached to the labor force. This group includes people who have given up their job search because they think that no jobs are available for them or barriers to work exist such as lack of education, training, skills or discrimination due to age, race or other characteristics.
Alternative Measures of Labor Underutilization
For many years six separate alternative measures of labor underutilization, including the official unemployment rate, have been published at the national level. These measures are also sometimes referred to as “U-rates.” In March 2009, the U.S. BLS released 2007 and 2008 alternative measures for all 50 states using data from the CPS. Visit http://www.bls.gov/lau/stalt.htm for more information. Currently, the alternative measures published by the BLS for states are restricted to calendar year and four-quarter averages. Monthly state-level data from the CPS do not meet BLS publication standards due to the small household sample sizes. However, readers should be aware that even annual or fourquarter average CPS data at the state-level can be subject to relatively large changes because of sampling error.
Table 1 shows 1998-2008 alternative measures for Illinois. The alternative measures are defined as follows:
- U-1, persons unemployed 15 weeks or longer as a percent of the labor force.
- U-2, job losers and those who completed temporary jobs, as a percent of the labor force.
- U-3, total unemployed, as a percent of the labor force. This is the same definition as the official unemployment rate.
- U-4, total unemployed, plus discouraged workers as a percent of the labor force.
- U-5, total unemployed, plus discouraged workers, plus all marginally attached workers, as a percent of the labor force plus all marginally attached workers.
- U-6, total unemployed, plus all marginally attached workers, plus total employed parttime for economic reasons as a percent of the labor force plus all marginally attached workers.
How do Alternative Measures of Labor Underutilization Compare and Change Over Time?
As Chart 1 shows, each of the alternative measures move in the same direction during periods of economic growth and decline. The U-3 (the unemployment rate) and U-4 (unemployed plus discouraged workers) rates were very close in terms of actual percentages and virtually identical in the size of annual change. The U-6 rate reported its largest annual increase in 2008, rising 3.1 points to 11.7 percent. However, this was not surprising given that U-6 includes the broadest definition among all measures and is more sensitive to changes in the economy, particularly increases in the number of people employed part-time for economic reasons. We also examined the ratio of the U-6 rate to the unemployment rate and found that it had remained stable over the years, rising only slightly in 2008 (from 1.7 to 1.8) as the economy declined.
The annual unemployment (U-3) rates cited here are taken from the CPS and may not match the official annual unemployment rates produced by BLS state labor force models. For example, the 2008 Illinois unemployment rate from the CPS was 6.6 percent and the official Illinois model-based 2008 unemployment rate was 6.5 percent. A report including official, annual 2008 unemployment rates for all states can be found at http://www.bls.gov/lau/lastrk08.htm.
Illinois Compared to the Nation During most of the past eight years, the U-6 rate has been slightly higher in Illinois as compared to the U.S (see Table 2 and Chart 2). But in 2008, the increase in the U-6 rate for Illinois was nearly 1.0 point higher than the increase nationwide. For the past four years, we have seen larger annual changes in Illinois for nearly all alternative measures, including the unemployment rate and U-6 rate, as compared to the nation.
Illinois Compared to Other States
States with the highest unemployment rates also had the highest U-6 rates; the reverse was true for states with low unemployment rates. In 2008, Illinois had the sixth highest unemployment rate and the eighth highest U-6 rate among all states (see Table 3, next page). Michigan had both the highest unemployment and U-6 rates. Wyoming was tied with South Dakota for the lowest unemployment rate and had the lowest U-6 rate. Rhode Island reported the largest increases in both unemployment and U-6 rates between 2007 and 2008 (see Table 4, next page). Illinois was tied with Delaware and Nevada for the 11th largest annual increase in the unemployment rate and had the eighth largest annual increase in the U-6 rate. Finally, it should be noted that the annual average unemployment rates do not fully refl ect the labor market deterioration in 2008. In most states, unemployment began to rise sharply during mid-year 2008.
Alternative Measures of Labor Underutilization and Unemployment Rates
The alternative measures of labor underutilization should not be viewed as alternative unemployment rates. The U-6 rate is sometimes called the “real” unemployment rate. However, the offi cial unemployment rate is intended to be an indicator of available labor supply and not a measure of economic
hardship. The U-1, U-2, U-4, U-5 and U-6 rates could be thought of as alternative measures describing various levels of weakness in the labor force but are not directly comparable to the unemployment rate.
For more information, please contact Rich Reinhold at Richard.Reinhold@Illinois.gov or 312.793.5896