Normative Narratives

What is the “True” Unemployment Rate?

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Disclaimer: I work for the Bureau of Labor Statistics. The views here are my own and do not reflect the views of the Bureau of Labor Statistics or U.S. Department of Labor. Furthermore, they should not be interpreted as a disagreement with what the Bureau reported. Indeed, it is only because of the transparency of the Bureau’s reporting that I was able to put together this analysis (all numbers in the analysis below come from the link above or the Employment Situation news release, unless otherwise noted).

The Bureau has good reasons for not correcting likely misclassified survey responses. As a private citizen, I simply have more leeway in my analysis than the famously impartial and consistent BLS does.

Note: All data used in this analysis is not seasonally adjusted

For those who follow such things, the April Employment Situation news release (“Jobs Report”) was perhaps the most anticipated in history. Never has such a dramatic over-the-month change in the U.S. economy been recorded. The Great Depression predates the Bureau’s employment numbers, and even if it didn’t it was more of a sustained contraction over time than an abrupt shutdown by design.

The official unemployment rate (U-3) came in at 14.4% as of the week ending April 18th (the data for this month’s release were based on a survey conducted April 12th-18th). This is calculated by dividing the number of unemployed people (22.5 million) by the number of people in the labor force (the unemployed and the employed, 155.8 million). Typically to be considered “unemployed”, one must be out of work and have actively looked for work in the past four weeks. This requirement has been relaxed somewhat to account for the realities of COVID-19, most notably to include people who are temporarily laid off but expect to be recalled, and therefore not actively looking for work. In fact this group represents the vast majority of those currently considered unemployed (17.9 of the 22.5 million), offering a ray of hope that some of them may indeed be recalled.

That figure, however, likely should’ve been even larger. According to the Bureau, it is likely that 7.5 million people should’ve been included in this group, but were instead considered “employed–not at work, other reason” (based on the fact that there are 7.5 million more people in this group now than there were a year ago). If you add this group to the unemployed, you get an unemployment rate (call it the “true U-3”) of 19.3% (22.5 + 7.5 / 155.8).

But many people believe the official unemployment rate doesn’t really capture the state of the labor market. These people often turn to an alternate measure, the U-6, to determine a “true rate” of labor underutlization. We do not call call the U-6 an “unemployment rate”, because as you will see in a moment it includes some part time workers.

The U-6 is the number of unemployed (22.5 million) plus the number of people working “part time for economic reasons” (would rather work full time but can’t find a full time job – 10.7 million) plus those “marginally attached to the labor force” (want a job, available to take a job, have looked for a job in the last 12 months but not in the last four weeks (2.2 million)), divided by the labor force (156.5 million) plus the marginally attached (2.2 million). In April, the official U-6 rate was 22.4% (22.5 + 10.7 + 2.2) / (155.8 + 2.2).

If we add those 7.5 million people that likely should’ve been coded as unemployed, we get a U-6 of 27.2%. But there was also a large increase in the number of people who are not in the labor force who currently want a job, but do not meet the criteria to be considered “marginally attached”; there were 4.8 million more in April 2020 than there were a year earlier. While the Bureau did not note this as a potential survey error, I think it is fair to say most of these people should have been included in that “marginally attached” figure. Lets replace the “marginally attached” with this broader figure of people who are not in the labor force but want a job. Using these figures, we end up with a “true U-6” of 28.3% (22.5 + 7.5 + 10.7 + 4.8) / (155.8 + 4.8). This 28.3% is a good estimate of labor underutilization (or at least was as of the week ending 4/18).

No matter how you slice it the economy is in bad shape right now. Even taking that conservative “true U-3” number of unemployed (22.5 million, and the 7.5 million misclassified as employed), we have 30 million people. At the same exact point in time (the week ending April 18th) the Department of Labor reported that 17,776,006 people were covered by unemployment insurance (UI). In other words, only 59% of unemployed people were receiving benefits. In fact, since some states are offering partial UI for people with reduced hours (who would not be counted in those 30 million unemployed), the true percentage of unemployed people receiving benefits could be significantly lower.

Things have only continued to deteriorate since the jobs report survey was taken. From that point to the week ending May 2nd (the most recent data), 6,338,351 new people have filed for UI. While weekly initial claims are on a downward trend, they are still at very high levels and could unfortunately plateau there if reports of unfiled UI claims and processing backlogs are true.

If all of these different unemployment rates (official and otherwise) are confusing, here is a number that cuts through the fog: only 51.3% of America’s working age population (16+) is employed, the lowest rate since the Bureau began tracking that figure in 1948. 

The U.S. economy is almost 70% consumption based. Our Federal and State governments must do a better job processing UI claims, keeping people employed, and figuring out some sort of debt forgiveness system while shutdowns are in effect (as Senators Warren and Brown have proposed). If they fail to do these things not only will people suffer, but our economic recovery will be anemic regardless of how soon things open back up.

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