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Posts tagged with: "NEIPTERM156SFRBRIC"

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What is unemployment?

There is more to it than not working

What is unemployment? To answer this question first requires a few definitions. A person is considered unemployed if he or she is actively seeking work and willing to take work here and now. It is therefore not sufficient to simply not be working. But this definition of unemployment does necessarily define (1) whether someone who is underemployed should be counted as well or (2) how intensely someone must search for a job to qualify as unemployed. For this reason, the Bureau of Labor Statistics provides different unemployment rates, graphed above. These are commonly called U-1 through U-6:

  • U-1 counts only those who have been unemployed for at least 15 weeks, which was traditionally a little longer than the average duration of an unemployment spell. This is considered to exclude short-term unemployment.
  • U-2 counts those who are unemployed because they have lost a job or completed a temporary job—in other words, workers in a precarious situation in the labor market, as they are more likely to find an unstable or unsatisfying job.
  • U-3 is the headline unemployment rate generally reported in the media: People who are able to work, ready to work, and have looked for work in the past four weeks. This corresponds the most closely to the definition of unemployment we started with.
  • U-4 is U-3 plus those who would like to work but have stopped looking—the so-called discouraged workers—because they believe there are no jobs for them.
  • U-5 is U-4 plus those who are marginally attached to the labor market who, for any reason, are no longer searching for work but may still work.
  • U-6 is U-5 plus those who are working part-time but would prefer to work full-time.

These various interpretations of the definition of unemployment allow us to have a better understanding of the status on the labor market. But one may still have some misgivings about them. For example, the higher-numbered definitions give equal weight to different classes of unemployed workers. For example, should a person qualifying for U-1 count as much as a person qualifying only for U-5 and U-6 when evaluating the health of the labor market? To address this question, there is the Hornstein-Kudlyak-Lange index that creates a weighted sum of the different categories. The goal is to evaluate the underutilization of labor in the economy. This index (it is available with and without the part-time workers from U-6) is plotted below along with the popular U-3.

The graph below shows the non-employment rate, which is quite different from the unemployment rate. Indeed, it counts all those who are not part of the labor force, which comprises those who are either working or unemployed. The non-employment rate, which is thus the complement to the labor force participation rate, measures those who do not want to work. Principally, these are retirees, students, people with various handicaps, people who dropped out of the labor force, and people who do not want to work. Note that military personnel are not part of any of these (civilian) calculations.

How these graphs were created: For the first graph, go to the Alternative Measures of Labor Underutilization release table from the Bureau of Labor Statistics’ Employment Situation release. Select all (seasonally adjusted) series and click “Add to Graph.” For the second graph, search for and select the monthly, seasonally adjusted unemployment rate. Then click on “Edit Graph” to add the two other lines: Search first for “non employment index” and select the base index (not the index that includes people working part-time for economic reasons). Then search for “non employment index” again and select the index that includes people working part-time for economic reasons. For the last graph, search for “labor force participation rate”, click on “Edit Graph” and apply formula 100-a.

Suggested by Christian Zimmermann.

View on FRED, series used in this post: CIVPART, NEIM156SFRBRIC, NEIPTERM156SFRBRIC, U1RATE, U2RATE, U4RATE, U5RATE, U6RATE, UNRATE

How healthy is the labor market, really?

Economists, policy wonks, and the public often look at the unemployment rate to quickly assess the U.S. economy. Although the unemployment rate provides some understanding of the cyclical state of the labor market, it doesn’t account for those who have dropped out of the labor force. The labor force participation rate captures that information. Both rates (shown in the top graph) have declined since the end of the Great Recession, which may imply that there’s unmeasured slack in the labor market.

Andreas Hornstein and Marianna Kudlyak from the Federal Reserve Bank of Richmond and Fabian Lange from McGill University constructed a more comprehensive way of examining resource utilization in the U.S. labor market. Their non-employment index (NEI) counts those who are unemployed (as traditionally defined) and those who have dropped out of the labor force. The NEI weights those who have dropped out of the labor force according to their “attachment”—defined by the Bureau of Labor Statistics as the likelihood a person will transition back to employment, which is based on each group’s historical transition rate to employment relative to the highest transition rate among all groups. This weighting allows the authors to count all non-employed individuals without drawing “arbitrary distinctions on who is to be included.”

The BLS classifies the groups in the index as (1) unemployed, (2) out of the labor force but desiring a job, or (3) out of labor force but without the intention to reenter. The BLS further categorizes those who are out of the labor force but want a job as (2a) marginally attached because they’re discouraged by poor job prospects, (2b) marginally attached but haven’t looked for work during the most recent month, or (2c) temporarily out of the labor force for other reasons. Finally, the BLS classifies those who are out of the labor force but do not want a job as (3a) in school, (3b) not in school, (3c) retired, or (3d) disabled.

Hornstein, Kudlyak, and Lange recommend interpreting the NEI in comparison with the standard measure of unemployment. Generally, the two measures move in line with each other, with the exception of the period following the Great Recession, as shown in the bottom graph. This graph also includes a third series—the green line—that incorporates those who work part time in lieu of full time for economic reasons. More information on the NEI can be found here.

How these graphs were created: Top graph: Search for and select the monthly, seasonally adjusted unemployment rate. Use the “Add Data Series”/“Add new series” option to search for and select the monthly, seasonally adjusted labor force participation rate; be sure to set the y-axis position to the right. Bottom graph: Again, search for and select the monthly, seasonally adjusted unemployment rate. Then use the “Add Data Series”/“Add new series” option to add the two other series: Search for “non employment index” and select the base index (not the index that includes people working part-time for economic reasons). Then search for “non employment index” again and select the index that includes people working part-time for economic reasons.

Suggested by Travis May

View on FRED, series used in this post: CIVPART, NEIM156SFRBRIC, NEIPTERM156SFRBRIC, UNRATE


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