More on the Rising Unemployment Rates

Quite a few people, including Glenn Reynolds, appear to be confused about the unemployment rates, specifically how both U-3 (those actively looking for work) and U-6 (U-3 plus marginally attached workers) could rise and it actually be good news. Here’s an explanation from Phil Izzo of the Wall Street Journal:

The 9.9% unemployment rate is calculated based on people who are without jobs, who are available to work and who have actively sought work in the prior four weeks. The “actively looking for work” definition is fairly broad, including people who contacted an employer, employment agency, job center or friends; sent out resumes or filled out applications; or answered or placed ads, among other things. The number ticked up this month as more people came back into the labor force to look for jobs. (Read a more in-depth explanation for the rise in the unemployment rate.)

The U-6 figure includes everyone in the official rate plus “marginally attached workers” — those who are neither working nor looking for work, but say they want a job and have looked for work recently; and people who are employed part-time for economic reasons, meaning they want full-time work but took a part-time schedule instead because that’s all they could find.

expanded on by Sudeep Reddy in the same publication:

The reported increase in the jobless rate to 9.9% from 9.7% wasn’t quite as sharp as it appeared on the surface. Unrounded, the figure actually rose to 9.863% from 9.749% in March. That’s about 0.11 percentage point. The unemployment rate is calculated by dividing the total number of unemployed people by the number of people in the labor force. When people re-enter the market to begin a job hunt again, they boost the number of the unemployed until they find a new position, boosting the overall unemployment rate.

In April, the civilian labor force rose 805,000 as more people joined the work force. That was the fourth straight monthly increase, amounting to a gain of almost 1.7 million people since the beginning of the year. Of the people added to the labor force in April, according to the household survey, 550,000 found jobs and 255,000 didn’t.

So, the rise in the unemployment rate was due to more people feeling that the economy is good enough to restart their job searches. That’s a good sign, even though it means more active competition for job-seekers.

Remember U-6 is inclusive of U-3. Consequently, if the number of people actively looking for jobs increases ceteris paribus both measures will rise. The good news is that it certainly appears that people have started looking again, believing they’re more likely to find jobs.

Something else to consider is how extending unemployment benefits longer and longer influences these statistics. I would presume that at the very least at the margins unemployment benefits keeps the unemployment rate (U-3) lower than it otherwise might be. Some people have probably stopped looking because the job market whereever they might be is poor and as they won’t expend wasted energy looking as long as they’ve got some money coming in. That means they wouldn’t be included in the official unemployment rate.

However, if money stopped coming in, they would in all likelihood start looking again and as a consequence the official unemployment rate would rise. In other words extending unemployment rates farther and farther isn’t just an act of charity and mercy, it’s shrewd politics. The higher the unemployment rate is over 10% the poorer in all likelihood Democrats will fare in the November elections. Maybe incumbents, generally. We’ll see.

6 comments… add one
  • PD Shaw Link

    If I understand this correctly though, marginally attached workers consist of two groups (1) discouraged workers who believe there are no jobs for them and (2) people who have not looked for work in the past four weeks because of school or family responsibilities (but have looked in the last year). In April the size of group (1) was the same as group (2).

    Isn’t it more likely (or at least equally likely) that marginally attached workers, who are now actively looking for work are currently students?

  • Sam Link

    I’ve seen a lot of back and forth on the continued unemployment benefits increases the unemployment rate. No one is arguing that it doesn’t do that, it always will to some extent. Up until now, though, that problem didn’t really matter because businesses weren’t having any trouble filling their openings. According to a recent article in the Economist vacancies are rising, so I think it’s time to stop with the extensions and have people filling positions they might otherwise pass on because they have benefits.

  • Drew Link

    I think its a bit scary that the Glen Reynolds of the world could not understand the issues and mechanics. (Although I confess I’d sure like to hear what a real economist like Steve Verdon has to say about the birth/death adjustment.)

    But it is not that complicated. The advertised rate is just plain wrong, subject to the whims (Read: attitude, and unemployment benefits situation, as Dave points out) of those looking, or not, for work.

    That’s one reason I don’t get excited about a .1 or .2 % change one way or another. There is a bit more “feel factor” than that.

    (And I get criticized here for “anecdotal” evidence!!)

    I’m still much more interested in certain fundamentals, as cited in the previous post, than month by month banded estimates of unemployment. (My words.)

  • Drew Link

    PD – Said more crudely, there is simply more slop in the numbers than people want to acknowledge, including the factor you cite.

    Slammin Sammy –

    Hole in one.

  • Although I confess I’d sure like to hear what a real economist like Steve Verdon has to say about the birth/death adjustment.

    Well, I’d say its a good attempt to try and get a better picture of what is going on in terms of unemployment/employment. How good is it? I’d expect it to be pretty decent over a range of time, but at certain key turning points in the economy it might have some issues. The number of deaths might be too large relative to the number of births. But not having seen the data I can’t say for sure, just a gut feeling.

    Now in a situation where a large number of reported job gains are due to new business births I’d be a little bit more…cautious about that number than I otherwise would be. In the current case, of the 290,000 jobs, about 188,000 are due to the Birth/Death adjustment. I hope its true, but we’ll have to wait and see.

  • Drew Link

    Steve V –

    And I guess that’s what has me a bit flummoxed over how to interpret this statistic. New business births is a good thing, and a prime source of new jobs. But maybe the negative interpretation is that new births are ever present, and that rising employment among established businesses is the only real measure in recovery. Its a hole in my economic understanding.

    No matter the “correct” answer, from where I stand things are still very fragiile. And only one boneheaded tax hike away from trouble.

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