Understanding the Unemployment Rate

One of the most widely published measures of the health of the economy is the unemployment rate.  In August, 2014, the published unemployment rate for the US was at 6.1%, according to the Bureau of Labor Statistics (BLS).  So what exactly does this measure mean and how does it determine the health of the economy?  As analysts we have learned that taking statistic at face value can lead to a skewed version of reality.

Did you know the government tracks six different versions of the unemployment rate?  They range from “People unemployed 15 weeks or longer” for U-1, to “Total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons” for the U-6 measure.  The typical published unemployment rate is known as the U-3 measurement by the BLS.  It is defined as total unemployed as a percent of the civilian work force.  Unemployed means the worker is not working but is actively looking for a job. 

U-3 does not include those who have been discouraged about their job prospects and have stopped looking.  Much of the improvement in the widely published U-3 rate comes from individuals who have left the job market.  This is shown by the shrinking labor force participation rate.  According to the BLS, as of August 2014, the labor force participation rate of people over 16 stood at 62.8%.  The civilian labor force is the sum of all employed and unemployed persons (note that unemployed is defined by U-3).  It does not include those in the US Armed Forces. 

At the end of August, the BLS estimated the number of available workers who are not in the labor force totaled 91.8 million.  That number has risen by nearly 2 million people in the past year.  The estimated US population of people over 16 from the Census Bureau as of July 1, 2013 was 250.9 million.  This means that nearly 37% of people over 16 are not in working or looking for a job.  Some of those people who are not in the labor force are students and some may be retired.  But still, the labor force participation rate is at the lowest level it has been since the Carter administration.  The Census Bureau projects the labor force participation rate to decrease over the next decade as the population ages and more people retire from the work force.

The largest level of unemployment measure, the U-6, has the numerator as all unemployed, part time employed who want to be employed full time, plus those marginally attached to the labor force.  Marginally attached laborers are those who cannot find a job and have decided to just stop looking for a job.  These people would be actively looking for a job if they believed they had opportunity to find a job.  These people have given up hope to find employment.  The total of U-6 for the US stood at 12.0% as of the end of August.  Clearly, the U-6 number does not paint as pretty of a picture of unemployment as the U-3 does.

Over the past year, U-3 has dropped from 7.2% to 6.1% and U-6 has dropped from 13.6% to 12.0% on a national basis.  This may lead on to believe that the economy is getting better.  At the same time, the civilian labor force participation has dropped from 64.3% to 62.8%.  As people leave the labor force who were unemployed, it reduces both the numerator and denominator of the unemployment rate calculation by the same number.  This will cause the unemployment rate to decrease without actually creating more employment. 

Unemployment rates also vary greatly by states.  The lowest rates for both U-3 and U-6 is in North Dakota, where the rate is at 2.8% and 5.5%, respectively.  The highest U-3 rate is Rhode Island at 8.9%, while both California and Nevada had the highest U-6 rates at 16.2%.  The states that MWBS owners are located in have U-3 that ranges from 2.8-3.6% and U-6 rates of 5.5-7.3%.  These are some of the lowest unemployment rates in the country.  We have heard of businesses in this area that have experienced labor shortages and others, especially in the oil patch, that have to pay high rates just to get workers. 

One interesting thing about unemployment is that even though the rate appears to be decreasing, partly from new job growth and partly from people just leaving the work force, there still is a need for skilled workers in this country that are not being filled at the present time.  If you have a skill that is in demand in the economy, you can find a position.