The first Friday of every month, the Department of Labor releases its monthly jobs report. The figure usually reported in the media as the ‘unemployment rate’ is actually just one of six different classifications of unemployment that the Department uses. These are numbered U-1 through U-6 and as the numbers go up, the wider the definition of unemployment. The most common reported by the media and considered the official unemployment rate is referred to as the U-3 rate.
How Rates are Calculated:
Unemployment is almost always reported in terms of percentage rates. In calculating the rates, there are two numbers that are used: The numerator, being the number of people who fit the definition of unemployment for that classification and the denominator, which is the size of the total potential workforce. Divide the two, and the result is the unemployment rate for that classification. Complicating matters is the fact that there are three different potential workforce populations used in the rates. U-1, U-2 and U-3 all use the same potential workforce number, U-4 has one all to its own, with U-5 and U-6 sharing one between them. Because the higher classifications count individuals who are no longer considered part of the workforce, when calculating those rates, those individuals must be added into the total potential workforce as well.
U-1: This is the narrowest definition of unemployment, counting only those who are unemployed for 15 weeks or longer.
U-2: A slightly wider definition, including those who would be counted as U-1, plus all of those who have lost their jobs involuntarily and those who have completed temporary jobs. A recent example of a temporary job would be someone who took a job as a census taker for the 2010 Census, knowing that once it was completed, their employment with the Census Bureau would be terminated.
U-3: This is considered the official unemployment rate by the Department of Labor and the one most often cited in the media. This rate includes all those who are unemployed and are seeking employment as well as those classified as U-1 and U-2.
U-4: This rate is U-3 plus those workers who are considered ‘discouraged workers.’ In laymen’s terms, these are individuals who are unemployed but not looking for employment only because they think there are no jobs available and to look would be in vain.
U-5: This rate is U-4 plus those workers who are marginally attached to the labor force. Essentially it includes people who are unemployed and not looking for work for any reason, market related or not.
U-6: This rate is U-5 plus all those who are working part-time due to the poor jobs market, but who want and are available to work full time. An example would be a recent college graduate working part-time as a waiter to get by, but would like to work full time in his or her chosen field.
Before the recent economic downturn, few people discussed any rate other than the official unemployment rate, the U-3. However, the nature of the last recession, as well as the lack-luster recovery has given rise to a debate concerning U-3’s preeminence. Some have argued that given the current economic climate, the U-6 rate is actually a more accurate representation of the state of unemployment.
For the past 18 years, the difference between the U-3 rate and the U-6 rate ranged between 3 and 4.5 percentage points. Since early 2009 however, at which time the recession had been underway for more than a year, the spread rapidly ballooned to 7 percentage points and has remained at or just below that for the last 3 ½ years, unprecedented since the tracking of the U-6 rate began.
This decoupling of rates spurred recent debate of using the U-6 rate over the U-3 rate. The U-6 rate counts the people who have simply given up looking for a job, due to the poor state of the economy and those who have taken part-time work but would otherwise want to be employed full time. People who fall into these categories are not counted under the official unemployment rate.
With a slower than normal recovery, we are seeing an atypical surge of those two groups of workers counted in the U-6 data, but this trend, while critically important when trying to assess the state of unemployment in the country is not represented in the official U-3 rate.
Those who argue for using the U-6 rate point to this fact specifically as the reason to use it over the U-3 rate. This is not to say that the U-3 rate is inaccurate, but its definition of unemployment is too narrow for the current economic climate, failing to capture those two groups of people, whose ranks have swelled rapidly due to an abnormally slow recovery.
As of June 2012 the spread between the two rates was 6.7 points, but trending upward. While it is impossible to say for certain, but it stands to reason that the vast majority of the roughly 3 percentage point overhang from the normal rates can be directly attributed to the tepid recovery.
A New Official Unemployment Rate? Tempting, but Short Sighted
As noted earlier, generally the U-3 and U-6 rates have stayed within a range of 3 to 4.5 percentage points, the 7+ gap as of late is an entirely new phenomenon. It is true, that while the U-3 rate has been a good measure in the past, economic conditions of late have resulted in the official unemployment rate partially masked the true extent of unemployment in the US.
At this point, it seems short sighted to abandon our current measure of unemployment, with the understanding that the current decoupling of the wider definitions of unemployment with the official rate is a fluke.
Should the current state of economic malaise become the ‘new normal’ as some have suggested, changing the designated official unemployment rate would be worth some serious consideration, although stretching to the U-6 would be a bit far. If the goal is to include people who have given up looking for work purely due to economic considerations, then the U-4 rate is worth a look. Like the U-6, it moves in tandem with U-3, albeit at a much closer statistical distance, usually in the neighborhood of .25 percentage points. As of June 2012 it was double that, .5 percentage points, putting the U-4 rate at 8.7%.
 Spread calculated by author from data published by the Bureau of Labor Statistics: http://www.bls.gov/webapps/legacy/cpsatab15.htm