Official unemployment rate by county, 2007-2014
The unemployment rate is back to early 2008 levels. Does that mean the economy has recovered?
In the most recent U.S. jobs report, released at the end of last month, the unemployment rate remained stable at 5.1%. Taking this number at face value, U.S. employment has returned to pre-crisis levels, and it would seem the economy is back to normal.
However, as we all know, the unemployment rate is not a perfect measure. It does not account for various groups of people who are not working and do want a job, but for one reason or another do not fit into the official definition of “unemployed.”
Still, for all the times I have read that we should not blindly trust the unemployment rate, I don’t recall ever seeing a clear explanation of exactly what groups are omitted from the calculation.
It turns out there are many.
The government tracks several alternative measures of unemployment
Along with the official unemployment rate, the government produces 5 other measures of employment, called alternative measures of labor underutilization. They range from U-1, a strict definition of what constitutes “unemployed,” to U-6, the broadest definition. The official unemployment rate, U-3, is somewhere in the middle.
Here is how the Bureau of Labor Statistics (BLS) describes each of these measures:
- U-1 measures only people unemployed 15 weeks or longer.
- U-2 consists of job losers and persons who completed temporary jobs.
- U-3 is the official unemployment rate, including all people who have actively been looking for work in the last 4 weeks.
- U-4 includes the unemployed, as defined by U-3, plus discouraged workers, people who want to work, but have given up searching because they were not able to find a job.
- U-5 measures the same groups as U-4, plus marginally attached workers, people who are available and want to work, but are not currently searching for a job for a reason other than discouragement over job prospects (e.g. transportation problems, ill health, family responsibilities).
- U-6 is the broadest measure, including everyone included in U-5 plus people who are working part-time because they are unable to find full-time employment.
I had always understood discouraged workers to be the most important piece missing from the official unemployment rate. But looking at these figures, it appears that adding discouraged workers makes only a small difference to the overall unemployment figure. The same is true for marginally attached workers.
Part-time workers unable to find a full-time job are the only group that raises the number by a substantial amount. And while I fully appreciate the importance of measuring this group, it’s pretty logical that underemployed workers would not be included in the unemployment rate. So it seems like a stretch to call the unemployment rate wrong for this reason alone.
People who want a job, but did not search in the past year are not included in any measure
The alternative unemployment measures listed above contemplate two groups of people who want a job, yet are not technically considered “unemployed” (discouraged workers and marginally attached workers). However, there is a third group that is left out from these measures: people who want a job, but did not search in the previous year.
This group is not only the largest of the three, but it has also continued growing steadily since 2007, whereas the other two groups initially grew, but have since recovered.
Marginally attached workers and discouraged workers are not counted in the official unemployment rate, but they are included in the government’s alternative unemployment measures. Like the unemployment rate, their trends are consistent with a recovering job market.
The third group, people who want a job, but have not searched for one in the past year, is not included in any of the alternative unemployment measures. It’s trend is strictly upward, and does not conform to the economic recovery narrative.
Disability programs have also removed people from the labor force
Another group that is not commonly discussed in the context of the employment picture is the skyrocketing number of people on federal disability.
Here is how the two largest disability programs, Social Security Disability Insurance (SSDI) and Supplemental Security Income (SSI), have grown over time.
Before you call me out for picking on people with disabilities, please have a look at this excellent post from NPR’s Planet Money, which goes into depth on the topic. The story is fascinating.
Somehow, federal disability programs have remained under the radar, despite having grown immense in size. Not to minimize their importance for people who have legitimate disabilities, but for many people who do not, these programs have essentially replaced welfare as an alternative source of income for people who are discouraged / hopeless about their employment prospects.
These disability programs have also continued to grow throughout the economic downturn and recovery. With a few small exceptions, beneficiaries of these programs are not counted in the official unemployment rate or any of the government’s alternative unemployment measures.
How does the picture look when you put these pieces together?
These charts plot each of the groups mentioned above, from 2007 to 2014.
To what degree is arguable, but groups (a), (b), and (c) all include working-age people who are not currently employed, but would like to work if circumstances permitted.
If you were to include these groups in the unemployed population, the total number becomes essentially flat since 2009.
What do you think? Is the unemployment rate just a big lie? Or is it the best measure of unemployment we have, despite it’s flaws?
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Max Galka
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