Why the Official Unemployment Rate Doesn't Work

Today is the day that the official unemployment rate statistics are released. Both those on the Left and the Right attempt to make heads or tails of the numbers in terms of figuring out the overall state of the economy. Much like with the Gross Domestic Product (GDP), I have to ask myself whether it's all that it is cracked up to be.

The official unemployment rate calculated by the Bureau of Labor Statistics (BLS), also known as U-3 unemployment, captures those who have been without work and have been looking for at least four weeks. The BLS measurements for unemployment are as follows:

• 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
• U-4: Total unemployed plus discouraged workers, as a percent of the civilian labor force plus discouraged workers
• U-5: Total unemployed, plus discouraged workers, plus all other persons marginally attached to the labor force, as a percent of the civilian labor force plus all persons marginally attached to the labor force
• U-6: Total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the the labor force

Looking at the other definitions that the BLS calculates, it perplexes me as to why they opt for U-3 as the official measurement. Perhaps it is because U-3 unemployment portrays a rosy enough picture while still conveying some information. The issue I have with U-3 unemployment is that it understates the extent of unemployment. For instance, why does the BLS not opt to use U-4 as the official rate? The addition of the amount of discouraged workers better signal the extent of labor market instability.

If we want to play semantics, the U-6 indicator is technically an underemployment measurement. I'm not a fan of people using the U-6 indicator in attempts to perpetuate the myth of part-time America. Nevertheless, the U-6 unemployment rate depicts a more accurate picture of the strength of the labor market than the U-3 unemployment rate, much like the employment-population ratio and the labor force participation rate help us do.

Even if we were to use U-6 rate, there are still two issues with using the national unemployment rate: 1) the rates require substantial estimation and readjustments, and 2) there is no such thing as a national unemployment rate because the rates vary so much from state to state.

So the next time you see the "unofficial unemployment rate" decrease, don't think to yourself "Look at that, the economy is getting better." Instead, think to yourself, "Big whoop-de-doo! Tell me when you have actual news to report."