Alongside the economic growth rate and the inflation rate, the unemployment rate is one of the most widely reported and discussed economic indicators. It makes regular appearances on newspaper front pages and nightly news broadcasts because it provides a simple snapshot of the condition of the economy. Many assume that the unemployment rate is a straightforward measure of people who are out of work, but the reality is more complicated.
A Little Background
The U.S. Bureau of Labor Statistics (BLS) is responsible for measuring the nation's unemployment rate by carrying out a monthly survey, known as the Current Population Survey. Each month, the BLS contacts 60,000 randomly selected households across the country and records the employment status of each person 16 years old or older. The collected data is then used to extrapolate a variety of national labor force statistics, including six different technical measures of the unemployment rate.
These six unemployment rates are labeled U-1 through U-6, respectively. For the Current Population Survey, an unemployed person is not currently working but is available to work and has actively looked for work at some point during the prior four weeks. The civilian labor force is the sum of all employed and unemployed people. A person who has no job and has not looked for a job in the last four weeks is not technically an unemployed person and is not included in the labor force.
The Technical Measures of the Unemployment Rate
The first two BLS measures of the unemployment rate, U-1 and U-2, are very narrow. The U-3 unemployment rate is the officially recognized rate of unemployment, measuring the number of unemployed people as a percentage of the labor force. Unless otherwise stated, all generic references to the employment rate in government communications and in the media refer to U-3 unemployment.
The U-4 unemployment rate is similar to the U-3 rate, but it adds in a category of people who are technically outside the labor force, known as discouraged workers. Discouraged workers desire work and have actively looked for work in the past 12 months, but they have not looked in the last four weeks because they don't believe there is work available for them due to economic conditions or other reasons.
The U-5 unemployment rate includes everyone in the U-4 rate, in addition to any people who are available to work, willing to work and not discouraged from looking for work, but who have not looked for work in the prior four weeks for some other reason. The U-6 unemployment rate includes everyone in the U-5 rate plus any people who work part-time because full-time work is not available due to economic conditions.
The True Unemployment Rate
The U-3 unemployment rate is a comparatively narrow technical measure that leaves out a whole swath of out-of-work people who are willing and able to take a job but who don't fit the narrow BLS definition of "unemployed." For example, a stonemason who wants to work but who has become discouraged by a lack of opportunity in the midst of a deep economic recession would not be included in U-3 unemployment. A marketing executive who is laid off at age 57 and stops scheduling new job interviews due to their experience of age discrimination would not be included in U-3 unemployment. A person who only works one six-hour shift per week because no full-time jobs are available in their area would not be included in U-3 unemployment.
In contrast to the U-3 rate, the U-6 unemployment rate includes all of these cases. Consequently, the U-6 rate is much truer to a natural, non-technical understanding of what it means to be unemployed. By capturing discouraged workers, underemployed workers and other folks who exist on the margins of the labor market, the U-6 rate provides a broad picture of the underutilization of labor in the country. In this sense, the U-6 rate is the true unemployment rate.