No economic indicator — whether of price levels, employment, output or whatever — is flawless.
No indicator, by itself, gives a full picture of what it is measuring. All involve assumptions that strike some as stupid. But it is vital to be able to measure economic factors, even imperfectly, for clues to what is happening.
The first point in all this is that the employment rate is not, as many believe, dictated by the White House. Unfortunately, a large proportion of Americans do believe that all such indicators are corrupt.
They are not. Bureau of Labor Statistics tabulators take pride in what they do. If someone tried to cook the books, it would be leaked to the media instantaneously. The system even isolates those surveying households about who has jobs from those querying employers about numbers on payrolls.
But nevertheless, during Republican administrations people on the left complain that the president is dictating phony numbers. When a Democrat occupies the White House, people on the right see a scam.
So let’s proceed to the limitations of the most commonly cited unemployment rate. Economists know this as the “U3 rate” after the table in which it appears monthly.
Remember that all Americans past their 16th birthdays fall into one of three categories. If they have a job, they are “employed.” If they don’t have a job but are taking concrete steps to get one, then they are “unemployed.” These two combined compose the “labor force.”
The third category is those without jobs and not trying to get them. Typically, it is because they are retired, disabled, in school full time or working only in the home. They are “out of the labor force.”
Assigning specific criteria to these general definitions is not easy. Just what constitutes being employed? If you worked only one hour for pay in the week in question, were you really employed? If not, then at what threshold were you employed — five hours? Ten? And why is there only one “reference week” in a month? Why not two or three?
What if you have a degree in engineering but are driving for Uber? What if you would like to work full time but you only get two shifts per week?
And what constitutes looking for a job? What if you filled out applications a few weeks ago or are going to a job fair soon but did nothing during the reference week? What if you really want to work as a systems analyst, but you don’t interview well, so you play video games and live in your parents’ basement?
For any variable, one can list examples that most people would agree should be covered and others that most would find ridiculous. And there are many possible circumstances in between.
Uniformity over space and time in making economic measurements is vital. One cannot leave matters to the subjectivity of individual interviewers. Arbitrary, clear and consistent bests subjective in seeing how things progress.
The most commonly cited U3 unemployment rate has strict criteria for what constitutes being employed and what constitutes looking for work. There have been refinements in techniques since the series was started in 1913, but the resulting numbers are comparable over their whole range.
If one surveys thousands of households, one can ask additional questions to determine if people are getting as many hours as desired or are using all their skills. And one can identify those who genuinely want a job but did not meet the specific criteria deemed sufficient.
So the BLS also publishes data on these “discouraged workers” and on those “underemployed” and even those “marginally attached to the labor force.”
Add these to the headline U3 unemployment rate and one gets the “U6 rate.” It is always higher than the U3 rate. And the gap between them varies with the business cycle. In a recession, the U6 rate is much higher than the U3 rate. During a boom, when employers are avidly seeking new hires, the gap shrinks.
One often reads breathless announcements that the “real” unemployment rate is much higher than the headline one. But which really is “real” or “correct”? The answer is that they give complementary information about labor conditions. Each in itself gives an incomplete picture. Moreover, just knowing those two gives less information than if one also knows the specific breakdown of those with “fewer hours” or “fewer skills” or who are “discouraged workers.”
We would get different results if we set the age threshold at 18 rather than 16. The first better reflects the division between youth and adulthood in 2016 than it would have in 1913. But should we instead change it to 20 or 22, since many people now get postsecondary education?
The answer is that it is better to keep the same standard in place and collect enough information about age and education so that we can make additional tabulations that answer key questions. The BLS’s monthly Labor Situation report contains a wealth of information, but few people ever look at it, especially those prone to see incompetence and corruption in everything government does.
The difference between the narrow U3 rate and the broad U6 rate is part of the dynamics in many states’ labor markets right now, but a small one. This difference is largely “cyclical.” That is, it depends on changes in the business cycle of economic expansion and recession.
The “participation rate” or percentage of the total population that is “in the labor force” is a “structural” question, one flowing from longer-term changes in societal values about education and women’s roles, or from demographic shifts like the baby boom.
St. Paul economist and writer Edward Lotterman can be reached at email@example.com.