What's the best way to measure unemployment?

The Bureau of Labor statistics publishes several measures of unemployment each month. But which one provides the most accurate view?

The most commonly cited measure, known as "U-3," tracks the percentage of people who are actively seeking work. To be considered unemployed according to the U-3 definition, an individual must have looked for a job within the last four weeks.

However, this measure may miss three important factors. First, are the discouraged workers who have stopped looking for work because conditions are so bad they don't think they have any chance of finding a job. They'd work if they could, but they're not even looking anymore. Second, U-3 misses people who are working part-time but would rather be working full-time. Finally, it also misses those who are underemployed, i.e. working in jobs that they're overqualified for (e.g. an electrical engineer working at McDonald's because that's the only work available).

A much broader BLS definition of unemployment called U-6 adjusts for two of these factors. As the BLS notes, U-6 is the "Total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force, plus all persons marginally attached to the labor force."

The agency goes on to explain that "Persons marginally attached to the labor force are those who currently are neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime in the past 12 months. Discouraged workers, a subset of the marginally attached, have given a job-market related reason for not currently looking for work. Persons employed part time for economic reasons are those who want and are available for full-time work but have had to settle for a part-time schedule."

Here are the range of BLS measures:

  • U-1 -- Persons unemployed 15 weeks or longer, as a percent of the civilian labor force
  • U-2 -- Job losers and persons who completed temporary jobs, as a percent of the civilian labor force
  • U-3 -- Total unemployed, as a percent of the civilian labor force (official unemployment rate)
  • U-4 -- Total unemployed, plus discouraged workers, as a percent of the civilian labor force plus discouraged workers
  • U-5 -- Total unemployed, plus discouraged workers, plus all other persons marginally attached to the labor force, as a percent of the civilian labor force, plus all persons marginally attached to the labor force
  • U-6 -- Total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force, plus all persons marginally attached to the labor force

However, U-3 and U-6 are by far the most useful and the most cited measures.

How do they compare? The following graph plots U-3 and U-6 from 1994 through March of 2014 (U-6 is not available prior to 1994):

U3-u6

Clearly, for big swings in the unemployment rate, the two series move in tandem (that's also true for the other unemployment measures). So, for tracking the direction of change -- is unemployment rising or falling? -- it makes little difference which measure you use.

But there are differences. For example, if you look at the graph long and hard enough, you'll see that during the recovery U-3 has dropped faster than U-6, probably due to an abnormally high level of discouraged workers and involuntary part-time work. So, the economy would look better using changes in U-3 than it would from changes in U-6.

For this reason -- the fact that the two measures sometimes tell different stories -- it's best to look at both rather than either alone to get a full picture of the labor market.