Why We Need a New Unemployment Rate - YouTube

One of the most important measures of economic health is the unemployment rate.

Behind this single number are millions of people looking for a new way to make a living.

It also helps us shape effective policies.

The Federal Reserve uses it to steer the economy.

Jobs are often the defining political issue for Congress and the president.

That’s why having an accurate measure of joblessness is really important, otherwise

these policies will be badly targeted.

Problem is, the official unemployment rate doesn’t give us a full picture of the job

market’s health.

Luckily, we can use a survey the government already conducts to fix it.

All we have to do is listen to what people are already telling us.

Ok, so why is calculating unemployment so hard—just add up everyone who doesn't have

a job, right?

Well that rate would currently be about 40%--that’s higher than in the Great Depression.

So that seems off--and it’s because if that were our method we’d be counting students,

retirees, people with disabilities, and a bunch of others who aren’t looking for a

job.

What we’re really interested in is the rate of involuntary joblessness: the amount of

people who don’t have a job but wish they did.

So how do we know who wants a job?

Well, we ask them!

Each month, the Bureau of Labor Statistics surveys sixty thousand households to gather

a bunch of information about the job market.

The answers to this survey determine the official unemployment rate you hear reported in the

news.

This is sometimes called the 'headline’ rate--or in official econ-speak: the "U-3

rate" Here’s how it works:

If you have a job, you’re counted as employed.

Easy peasy.

Don’t have job?

Well, you’re not unemployed yet.

One follow-up: Are you actively seeking a job?

If the answer to both of those is yes, then you are unemployed under the official definition.

Together, the employed and unemployed form the labor force.

The number of unemployed is divided by the labor force and BOOM--that’s U-3, the official

unemployment rate.

But remember: many people aren’t in the labor force.

They’re in a third group you might have never heard of called the inactive.

The inactive is a large part of the population--and it’s mostly those students, retirees, and

others who don’t want a job.

But thanks to the same survey, we know some of the people included here do want a job—

they’ve just stopped actively looking.

And because of that, the U-3 doesn’t count them.

The BLS knows the U-3 rate isn’t perfect, so there’s also a U-4 rate, which has a

broader measure of unemployment.

For this rate, the BLS adds in people who have stopped looking for work because of problems

in the job market.

There’s even a U-5 rate, which adds in anyone who stopped looking for personal reasons,

like illness, or issues with transportation.

But all these rates leave some people who want a job still counted as inactive.

Now there is one more measure, U-6.

It adds in part time workers who want full-time jobs.

But adding in these workers muddies the issue of joblessness.

And remember, joblessness is what we’re really interested in measuring.

So U-3-4-5 don’t count everyone who wants a job, and U-6 confuses the idea of joblessness.

That’s why we need a new, Goldilocks rate, the one that’s juuuusst right.: Call it

the comprehensive jobless rate, or U-5b in econ-speak.

This unemployment rate is very simple: it counts every person who says they want a job

and is able to work.

Importantly, it also counts the people who gave up looking for work a long time ago,

which the other measures ignore.

In other words, the U-5b fully captures involuntary joblessness for the first time.

The difference in rate may seem small, but it reflects millions of people.

With this rate, not only would we have a better sense of the health of the job market—and

our economy—but we could also craft more effective job policies.

To learn more about unemployment, including the puzzle of inactive prime age men, visit

mercatus DOT org