A Brief Primer on Unemployment Rates
When talking about economics and the health of the economy, politicians love to bring up unemployment numbers. The unemployment percentage appears to be an easy to digest piece of data that everyone can understand… right? Well, not so fast. In this article I’m going to walk through the different types of unemployment statistics regularly reported, and try to translate them into easily understandable definitions.
What does “unemployment” mean, really?
Every month, the Bureau of Labor Statistics (BLS) publishes 6 different unemployment statistics, labeled “U-1” through “U-6.” The “official” unemployment rate is the U-3, but each of the U’s tells us something valuable about the economy. First, though, it’s helpful to define three basic terms to keep us on the same page:
- The Civilian Labor Force refers to people who are over the age of 16, not in the military, and either have a job (full or part-time), or who have actively looked for work in the past 4 weeks. This definition allows the BLS to exclude retirees, students, and prisoners, who don’t make sense to include in unemployment numbers. However, this definition also excludes individuals who would like a job, but have given up on looking for one, and the underemployed.
- The underemployed (or as the BLS so eloquently puts it “persons employed part-time for economic reasons”) are those who work a minimum of 1 hour a week, and receive at least $20 in compensation. It does not, however, refer to individuals employed outside of their chosen profession. An engineer working full-time at a McDonald’s is not underemployed by this definition.
- Marginally Attached Individuals refers to those who have given up looking for a job, but who are otherwise available to work, and have looked for work sometime in the last 12 months.
Now that we have those two important definitions in our heads, let’s take a look at the 6 unemployment numbers published by the BLS:
- U-1 reports the percentage of individuals in the civilian labor force who have been unemployed for 15 weeks or longer. You can think of U-1 as the rate of long-term unemployment in the US.
- The U-2 is an American single-jet engine, ultra-high altitude reconnaissance aircraft operated by the United States Air Force (USAF) and previously flown by the Central Intelligence Agency (CIA). It is also the percentage of individuals in the civilian labor force who are unemployed because they have lost their jobs, or completed temp work.
- U-3 is the “official” unemployment rate that most people are familiar with, and is the most commonly cited. It reports the percentages of individuals in the civilian labor force who are unemployed and have looked for work in the last 4 weeks. Remember that this excludes individuals marginally attached to the workforce and the underemployed, which has lead to arguments about whether or not U-3 should be replaced by the U-6 unemployment rate.
- U-4 includes everyone in U-3 plus discouraged workers, who are a subset of the marginally attached individuals. Discouraged workers are distinguished by their citation of a job-market related reason for ceasing to look for work (e.g. “There are no openings in my field”) as opposed to individuals who have given up looking for work for other reasons (e.g. “Nobody will hire me because I believe I am being discriminated against.”).
- U-5 includes everyone in U-3 plus all marginally attached individuals, regardless of their reason for not looking for work.
- U-6 includes everyone in U-5, plus the underemployed. This is sometimes referred to as the “real” unemployment rate, as it more effectively captures what the typical individual believes “unemployment” means. If you occasionally hear someone talking about unemployment numbers that are 4–5% higher than the “official” data, it’s very likely that they’re talking about the U-6.