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What The Unemployment Rate Does Not Tell You

Updated : October 8th, 2020

unemployment rate does not tell you

Among the many crises precipitated by the COVID-19 pandemic, the economic collapse and the resultant massive unemployment are uppermost among the public’s minds. The unemployment rate soared to 14.7% in May 2020 from below 3% in December 2019. As jobs have been a much-discussed issue even before the pandemic struck, everyone is wondering what the unemployment rate does not tell you.

Many experts had argued that the low unemployment rates before 2020 were not accompanied by commensurate increases in real wage growth. The pace of GDP growth has also not been in step with the number of jobs being added. The male prime-age employment-population ratio is not as high as it used to be pre-2000. How much can we rely on the unemployment rate estimates alone?

The unemployment rate is defined as the percentage of the labor force unable to work and find a job. However, other unemployment rates account for different dimensions of the same labor force that many economists think gives a more accurate indication of the real state of jobs. To understand what the unemployment rate hides from us, let’s begin seeing how it’s calculated.

How Is The Unemployment Rate Calculated?

Data Collection

The unemployment rate data comes from the Current Population Survey (CPS) that the US Bureau of Labor Statistics conducts every month. This survey takes information from a representative sample of 60,000 households that translates to about 110,000 individual interviewees. The sample is designed to represent every US state. It is customized for each state such that major geographic and economic divisions such as rural/urban areas, farming/non-farming areas, industrial areas, etc. are taken into consideration.

One-fourth of interviewed households are changed every month to keep the sample adequately representative. No single household gets interviewed for more than four months in a row and then gets left out for eight months. The same thing happens in the next calendar year, and then the households are excluded permanently. This rotation and repetition improve the reliability of the estimates.

The data is then extrapolated to the total population, and there are many weights taken to minimize distortions and sampling errors. The interviewers are also thoroughly trained as the survey’s results must be obtained by following uniform procedures.

Who Is Considered As Employed?

The surveyors ask the respondents various questions to determine their employment status. Anyone with a job, whether part-time or full-time, is considered employed. Those who don’t have a job but want one and are actively looking for at least four weeks are considered unemployed. The person must be over 16 years of age.

Here is a thorough list of the other considerations made when deciding whether to count a person as employed:

  • Only those engaging in active job search methods qualify as unemployed-sending resumes, contacting employers, making helpful connections, placing job search advertisements, registering with job agencies, etc.
  • Attending any professional training program doesn’t make one unemployed
  • Running a business or contributing to a family enterprise for at least 15 hours also counts as being employed, though such people may be classified as unpaid family laborers or contractors
  • One is employed even if he or she is not going to work for any reason, such as illness, caregiving, etc. 
  • Being on a temporary layoff will count towards being classified as unemployed, even if he or she has a recall date. one will be counted as employed for a reference week if he or she was paid for a few days and then lost his or her job

The Different Unemployment Rates

The statistic we are all most familiar with is the U-3 unemployment rate that the BLS reports every month in the Employment Situation. This value is the number of jobless people who are actively engaged in seeking employment, i.e., made efforts in the preceding four weeks.

The U-6 unemployment rate is another measure which counts the number of people who have been on a job hunt for the preceding 12 months, but was unable to find one, called the marginally attached. It includes those who are working part-time but would like full-time jobs ideally. The CPS survey doesn’t account for them.

Other methods of calculating labor underutilization:

  1. The U-1 unemployment rate is the percentage of people who have been unemployed for 15+ weeks in the labor force.
  2. The U-2 unemployment rate calculates the number of people who have lost jobs and/or completed temporary jobs as a percentage of the total labor force.
  3. The U-4 unemployment rate is the percentage of unemployed people and discouraged workers in the total labor force, including discouraged workers. Discouraged workers are those not currently looking for work due to the job market’s vagaries, such as the disabled or those without the right skills.
  4. The U-5 unemployment rate is the percentage of unemployed, marginal, and discouraged workers among the total labor force and the marginal labor force.

U-1 and U-2 are narrower measures of unemployment rate than U-3, the official figure quoted most often. U-6 is the broadest measure and is therefore thought to be a more accurate representation of the job market’s state.

What Does U-3 Unemployment Rate Not Tell You?

Changing Nature of the Job Market

The U-3 unemployment rate makes it near impossible to analyze how the job market has evolved over the years as it doesn’t account for the changing nature of the population. A predominantly young population may have higher unemployment numbers due to job-hopping and dropping out for better quality jobs. A predominantly older population may also experience ageism.

You will have to use other indicators to figure out how the contributing economic sectors have changed and how much skill the new jobs require.

Temporary Jobs

A lowered unemployment rate may be due to a spurt of temporary, short-term hiring, as the government did during the pandemic to deal with the high volume of unemployment insurance claims or conduct census or elections. The job quality is not apparent from the U-3 unemployment rate as it also counts the numerous entry-level or casual positions that may not provide much scope for future growth.

Underemployment And Being Shut Out

The U-6 unemployment rate is a better indicator for this particular reason. Many people are forced out of the job market due to skills mismatch or discriminatory policies. They may give up after having searched for jobs for a long time. 

Many workers may take up employment not matching their skill level for various reasons, typically a recession when there is a decrease in demand for skilled workers. It may also occur due to massive structural changes in an industry, such as adopting new technology or automation. 

The part-time employment figures have been persistently high over the years and are presently higher than the implications of the BLS U-3 rate.

Even before the pandemic, the fastest-growing job-creating sectors were retail trade, food & drinks, sales, etc. where most part-time jobs concentrated. This fact belies the creation of high-quality jobs that can sustain the workers’ aspirations. During the pandemic, these were also the sectors that took the biggest hit except for supermarkets and e-commerce retailers. 

It is not possible to accurately estimate the number of unemployed workers with all the nuances thrown in. The actual unemployment rate is likely much higher than even what the U-6 rate indicates. These values have to be considered along with other indicators like gendered labor force participation rates and education enrollment and completion rates for a comprehensive picture of the job market. As the economy evolves, new indicators would have to be developed.

 

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