Saturday, March 7, 2009

Do you know the difference between U3 and U6? Or, what a birth/death model is?

Unemployment was reported at 8.1% this week.

That doesn't tell the whole story , though. There are many measures of unemployment.

The commonly reported number - the one everyone waits breathlessly for every month - is referred to as U3 by the Department of Labor. Besides U3, there are U4, U5 and U6.

The refrain regarding unemployment typically goes something like this "sure, unemployment is up, but we are still a long way from the levels seen in the Great Depression, so let's not get too worried".

Again, that's not the whole story.

U3 includes workers who are "unemployed". This "includes anyone age 16 or older who is not institutionalized and is not currently employed, but able to work, available for work, and actively seeking work" (courtesy of the BLS).

What U3 doesn't include is those who are "marginally attached" or employed part time due to economic reasons. Put more simply: if you were a Director of Operations at Anytech earning $75,000 and you got canned and are now earning $6.25 an hour 10 hours per week at Walmart, you are considered employed for the purposes of calculating U3.

Clearly, this measurement doesn't accurately reflect efficient utilization of labor. This is where U6 comes in. According to the BLS, here is what U6 includes:

"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."

So, why report U3?


It looks better. The number has been defined down to include fewer and fewer people over the years to make the unemployment numbers look better (some people argue this was an part of a PR battle with Soviet Russia waged by Reagan. Who knows)?

At any rate, you may now wonder what U6 is today?


Care to guess how they calculated unemployment estimates in the Depression? I think you know the answer.

Next time, I will explain why the unemployment number is even more inaccurate thanks to something called a "Birth/Death" model.

In the meantime, here's a link to the Dept. of Labor stats.

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