DO ME A FAVOR AND ASK ABOUT UNDEREMPLOYMENT WHEN THE NEXT JOBS REPORT HITS

Every month the Bureau of Labor Statistics (BLS) publishes a report that’s used by policy-makers and pundits to assess the overall strength of the labor market. Among the report’s top metrics is the unemployment rate— the number of unemployed persons as a percentage of the civilian labor force.

Released on August 4th, the BLS’s most recent report indicates that the nation’s unemployment rate slightly dipped from 3.6% to 3.5% in July. That rate is not appreciably different from the 50 year historic low of 3.4% that was hit in January 2023

And that current rate of 3.5% is seventy percent lower than the 13% peak we hit in the second quarter of 2020, an ascent fueled, of course, by the pandemic induced recession.

While the unemployment rate is an important metric to track, many have observed that it fails to sufficiently capture the extent of labor market distress and, as a result, is significantly limited in its ability to function as a reliable gauge of the health of the jobs market.

For one thing, the BLS only counts you as unemployed if you’re a) without a job, b) have looked for a gig within the prior four weeks and c) currently available for work. If you can’t scale those three hurdles, then as far as the government statisticians are concerned, you’re not classified as “unemployed.”

If you can’t scale those three hurdles, then you don’t figure into the 5.8 million people —3.5% of the labor force- that the BLS counted as unemployed in its most recent jobs report.

To be more specific, the unemployment rate does not capture the number of people who work part-time but want a full-time job. This BLS puts these people into a statistical bucket called “part-time for economic reasons.” “Economic reasons” would include, among other things, slack work, unfavorable business conditions, and seasonal declines in demand. The point, though, is that the folk in this category are working part-time involuntarily. That they can’t secure a full-time gig is indicative of a form of labor market distress or slack—something that’s not picked up in the official unemployment figure that grabs the headlines every month.

Likewise, the monthly unemployment numbers—and, of course, the unemployment rate— do not account for a group that the BLS dubs “marginally attached” to the labor force.

Who are these people?

The “marginally attached” are persons who want a gig, are available to accept one, but who’ve not searched for a job in the last four weeks (although they have looked within the last year).

As in the case of those employed part-time involuntarily, the presence of this group— the marginally attached— is indicative of a form of labor market distress and slackness that’s simply not accounted for in the unemployment data that’s publicized every month.

None of this implies that the official unemployment rate is useless; rather, the point that’s being pushed is that, in order to get more accurate picture of the state of the labor market, we need to pay more focus on metrics that include the experiences of those employed part-time involuntarily, as well as those who want but have not looked for a job within the past four weeks (although they have looked within the last year). We need, in other words, to pay sustained attention to a measure that’s broader than the unemployment rate that we hear about every month.

If we want a more accurate picture of how much slack is in the labor market, then we need to track movements in the underemployment rate, not just the unemployment rate.

Here’s how one group of researchers put it:

"In addition to the number of unemployed (those without a job and actively seeking work), the underemployment rate captures the number of people who work part-time but would rather have a full-time job (called “part-time for economic reasons”) and those who want and can take a job but have not worked in the past four weeks (called “marginally attached”). It makes sense to include these groups in a measure of underemployment because while they are not unemployed in the formal sense, they would work more if the option presented itself. While the unemployed are often those most ready to take new jobs, workers who are marginally attached and part-time for economic reasons also stand ready to take full-time employment when employers are hiring."

A QUICK AND CLOSER LOOK AT UNDEREMPLOYMENT AND UNEMPLOYMENT

Graphs have a way of making things pop a bit more. Besides, like most economists, I sort of have a thing for graph. So, the one below quickly brings together a picture of long range changes in the unemployment and underemployment rates, respectively. Remember that that latter statistically construct—the underemployment rate— is arrived at by summing up all those individuals who’re 1) unemployed, 2) employed part-time involuntarily (for “economic reasons”) and 3) “marginally attached to the labor force.” The unemployment rate, on the other hand, is the number we always hear at each month— it’s that 3.5% figure, for instance, that’s reported in the BLS’s most recent jobs report.

Both the unemployment rate and the underemployment rate are computed on a monthly basis by the BLS but the latter— the underemployment rate— is only available beginning in 1994. The unemployment rate, though, is available beginning in 1948.

If you quickly inspect the graph, here’s some of what probably jumps right out at you:

• Both the unemployment and underemployment rate tend to rise during economic downturns (shaded grey bars) and to fall during economic upturns.

• During the pandemic induced recession, the unemployment rate hit a high of almost 15% (14.7%) in April 2020.

• In contrast to the official unemployment rate, the underemployment rate in April 2020 was an eye popping 23% (22.9%): One fifth of the labor force was underemployed!

• Both the unemployment and underemployment rates have dropped from their April 2020 highs to their current levels of 3.5% and 6.7%, respectively.

• The underemployment is always higher than the unemployment rate.

WRAPPING UP: TARGET THE UNDEREMPLOYMENT, NOT THE UNEMPLOYMENT RATE

So, what’s this got to do with the most recent jobs report and the 3.5% unemployment rate?

Plenty.

While movements in both the unemployment and underemployment rates have dropped considerably since their peaks during the most recent recession, the fact of the matter is that current underemployment rate ought to remind us that there’s still elevated levels of labor market distress, levels that are higher than that indicated by the official unemployment rate.

The current underemployment rate (6.7%) is almost twice as high as the unemployment rate (3.5%).

That 3.5% percentage rate implies that the number of unemployed persons is close to 6 million (5.8) million.

Now, if you throw into the mix the 4 million persons who are working part-time involuntarily and the 1.4 million who are marginally attached to the labor force (wanting a job, available for work, but not having looked within the past four weeks), you’re now talking roughly about an level of economic distress that’s greater than 11 million people — that’s the sum of the 5.8 million unemployed, 4 million employed part-time involuntarily, and the 1.4 million people who want a job but haven’t actively searched for one in the prior 4 weeks (click here to see raw numbers).

While things in the labor market have moved in the right direction, the underemployment rate makes it abundantly clear that there’s more slack and distress in the labor market than the official unemployment rate suggest.

If we’re about truth and accuracy, we need to pay more attention to that metric.

Catch you on the flip side,

Doc Greene

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