Wednesday, November 25, 2009

Unemployment Rates: Inclusive and Standard

In a post on Liberty and Power, Robert Higgs has an excellent discussion of an inclusive measure of unemployment, u-6, and the standard measure u-3. The standard measure had risen to 10.2 percent by October. The more inclusive measure was 17.5 percent. What is included in the u-6 measure? He quotes from the BLS, describing various items added to the standard measure to obtain the inclusive measure:

“Marginally attached workers are persons 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 recent past. Discouraged workers, a subset of the marginally attached, have given a job-market related reason for not looking currently for a job. 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.”
Of course, the standard measure takes those actively looking for work and divides by the labor force, which includes both those who are working and those who are actively looking for work.
Higgs introduced his post:

As the recession has deepened and the rate of unemployment has risen, a number of commentators have sought, for various reasons, to portray the situation as far graver than the “official” rate of unemployment indicates. Some of these commentators charge that the government is deliberately misrepresenting the amount of unemployment and that the “real” rate of unemployment is much greater than the official rate that the government announces and the news media report each month
I had the same impression listening to these alarmist reports, but I think that the key question is how much the more inclusive measure has risen relative to the standard measure during the recession. And so, I looked up the figures.
The graph below shows the standard rate and the inclusive rate since 1999.

The two series generally move together. For example, the standard rate went from 4.9 percent in December 2007 when the recession began to its current 10.2 percent rate. The more inclusive rate was 8.7 percent when the recession began and is now 17.5 percent. This increase in both implies a substantial increase in the gap between them.

The difference increased from 3.8 percent to 7.3 percent. With a labor force of 234 million, that is a lot of people--about 17 million. The "extra" people in the uncounted group today relative to the more normal 3.8% would be about eight million.
What proportion of the people in the more inclusive group are uncounted by the standard measure?

The Great Recession doesn't appear to have resulted in a large increase in "hidden" unemployment. I think the alarmist media reports are making the error of comparing the 4.9 percent standard unemployment rate at the beginning of the recession to the 17.5 percent inclusive measure of today.

On the other hand, millions of the people who are now discouraged workers, working part time but who want full time work and marginal workers, might be working if the economy were not in recession. Further, even when the economy is not in recession there are millions of people in those groups, suggesting that labor markets have problems. Is there an opportunity for free market reforms to generate a significant increase in potential income? The conventional wisdom (which I share) is that taxes and regulations disturb European labor markets, substantially reducing the productive capacity of Europe. These figures suggest that it is not so rosy in the U.S. either.

1 comment:

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