Alternative Measures of Unemployment
Because the unemployment rate does not include marginally attached workers and people who work part time for economic reasons, the BLS also provides three broader measurements of unemployment (or underemployment).
- U-1 Persons unemployed 15 weeks or longer, as a percent of the civilian labor force.
- U-2 Job losers and persons who completed temporary jobs, as a percent of the civilian labor force.
- U-3 Total unemployed, as a percent of the civilian labor force (the official unemployment rate).
- U-4 is U-3 plus discouraged workers.
- U-5 is U-4 plus other marginally attached workers.
- U-6 is U-5 plus employed part time for economic reasons.
The broader the measurement, the higher the rate at any given time period. However, these measurements tend to have similar fluctuations over the course of the business cycle. (12)
Since 1980, the number of people who are part-time workers for noneconomic reasons has remained roughly constant at about 13 to 14 percent of total employment and changes very little over the business cycle. The number of people who work part time for economic reasons (involuntary part-time workers), while consistently being much smaller than part time for noneconomic reasons, experiences large swings over the business cycle, increasing during recessions and decreasing during expansions. For recent data see U.S. Bureau of Labor Statistics (12)
Seasonal Fluctuations in Labor Markets
Total employment and unemployment are higher in some parts of the year than in others. For example, unemployment is higher in January and February, when it is cold in many parts of the country and work in agriculture, construction, and other seasonal industries is curtailed. Also, both employment and unemployment rise every June, when students enter the labor force in search of summer jobs.
The seasonal fluctuations in the number of employed and unemployed people reflect not only the normal seasonal weather patterns that tend to be repeated year after year, but also the hiring (and layoff) patterns that accompany regular events such as the winter holiday season and the summer vacation season. These variations make it difficult to tell whether month-to-month changes in employment and unemployment are due to normal seasonal patterns or to changing economic conditions. To deal with such problems, a statistical technique called seasonal adjustment is used. This technique uses the past history of the series to identify the seasonal movements and to calculate the size and direction of these movements.
A statistical procedure is then applied to the estimates to remove the effects of regular seasonal fluctuations on the data. Seasonal adjustment eliminates the influence of these fluctuations and makes it easier for users to observe fundamental changes in the level of the series, particularly changes associated with general economic expansions and contractions. Many of the monthly time series for major labor market indicators, especially those in the monthly Employment Situation report, are seasonally adjusted. More information about seasonal adjustment of CPS data is available in the CPS technical documentation. (14)
Types of Unemployment
Full employment does not mean that there is no unemployment. Full employment occurs when there is no cyclical unemployment or, equivalently, when all the unemployment is frictional and structural. The unemployment rate at full employment is called the natural unemployment rate. The term “natural” refers to the idea that some positive level of unemployment is the outcome in any dynamic economy. The underlying economic, social, and political factors that determine the natural rate of unemployment can change over time, which means that the natural rate of unemployment can change over time, too. (10)
In a market economy, some companies are always going broke for a variety of reasons:
- Old technology
- Poor management
- Good management that happened to make bad decisions
- Shifts in tastes of consumers so that less of the firm’s product is desired
- A large customer who went broke
- Tough domestic or foreign competitors
Conversely, other companies will be doing very well for just the opposite reasons and looking to hire more employees. In a perfect world, all of those who lost jobs would immediately find new ones. But in the real world, even if the number of job seekers is equal to the number of job vacancies, it takes time to find out about new jobs, to interview and figure out if the new job is a good match, or perhaps to sell a house and buy another in proximity to a new job. (10)
Frictional unemployment is the unemployment that arises from normal labor turnover as people enter and leave the labor force, quit jobs to find better ones, and from the ongoing creation and destruction of jobs. These workers are searching for jobs and unemployment related to this search process is a permanent phenomenon in a dynamic, growing economy. Frictional unemployment increases when more people enter the labor market or when unemployment benefits increase.
Structural unemployment is the unemployment that arises when changes in technology or international competition change the skills needed to perform jobs or change the locations of jobs. Sometimes there is a mismatch between skills demanded by firms and skills provided by workers, especially when there are great technological changes in an industry. Structural unemployment generally lasts longer than frictional unemployment.
Cyclical unemployment is the fluctuating unemployment over the business cycle. Cyclical unemployment increases during a recession and decreases during an expansion.
The natural unemployment rate is related to two other important concepts: full employment and potential real GDP. The economy is considered to be at full employment when the actual unemployment rate is equal to the natural unemployment. When the economy is at full employment, real GPD is equal to potential real GDP. By contrast, when the economy is below full employment, the unemployment rate is greater than the natural unemployment rate and real GDP is less than potential. Finally, when the economy is above full employment, then the unemployment rate is less than the natural unemployment rate and real GDP is greater than potential. Operating above potential is only possible for a short while, since it is analogous to all workers working overtime.
Unemployment and Real GDP
The quantity of real GDP at full employment is called potential GDP. Potential GDP is the value of real GDP when all the economy’s factors of production — labor, capital, land, and entrepreneurial ability — are fully employed.
When the economy is at full employment, the unemployment rate equals the natural rate of unemployment (no cyclical unemployment) and real GDP equals potential GDP.
When the unemployment rate is less than the natural rate of unemployment (negative cyclical unemployment), real GDP is greater than potential GDP. And when the unemployment rate is greater than the natural rate of unemployment (positive cyclical unemployment), real GDP is less than potential GDP. Real GDP minus potential GDP expressed as a percentage of potential GDP is called the output gap. (10)