The U-3 Unemployment Rate shows an Improving Economy while the while the U-6 Unemployment Rate begs to Differ

Posted by PITHOCRATES - March 17th, 2012

Week in Review

With a presidential election coming up this year everyone is trying to talk up the good employment numbers.  Even well respected economic magazines (see Leaving the nest posted 3/9/2012 on The Economist).

As Jed Kolko of Trulia points out, this morning’s report included good news on that front:

“In February, the unemployment rate for 25-34 year-olds dropped to 8.7% from 9.0% in January and is at its lowest level in three years. The unemployment rate for all adults stayed steady at 8.3%. The recession hit this age group especially hard: their unemployment rate peaked at 10.6%, compared to 10.0% for all adults, but this gap is now closing. In February, 74.7% of 25-34 year-olds were employed (the rest were unemployed or not in the labor force because they’re in school, discouraged from looking or not looking for other reasons), up from 73.9% a year ago, but still way below the normal level of almost 80%.”

The unemployment rates they’re discussing are the U-3 numbers.  The ‘official’ unemployment rate as reported in the news.  Which has fallen.  Despite this being a ‘jobless’ recovery.  Which begs the question how can the unemployment rate go down when there are no new jobs to hire the unemployed?  Good question.  To answer it will require a brief discussion about arithmetic.  Because that’s how you calculate the unemployment rate.  You divide one number (let’s call it ‘A’) by another number (let’s call it ‘B’).  Multiply the resulting decimal number by 100 and you get a percentage.  Arithmetically it looks something like this: (A/B)*100.

Let’s say ‘A’ is the number of people unemployed.  You reduce the unemployment rate, then, by making ‘A’ smaller.  And there are two ways of doing that.  You either hire more people.  Or you don’t count everyone who can’t find a full-time job.  Which is what the U-3 unemployment rate does.  It doesn’t count the people working part-time because they can’t find a full-time job.  And it doesn’t count the people who have quit looking for work because they can’t find anything.  There is another unemployment rate that includes these people.  And it is a more fair representation of the jobs picture.  And explains the ‘jobless’ recovery.  The U-6 unemployment rate.

The U-3 rate may be at 8.3%.  But we know that’s not a fair representation of the jobs picture.  Because this so called ‘recovery’ is jobless.  And the U-6 rate explains how this ‘recovery’ can be jobless.  For the U-6 unemployment rate was 14.9% at the end of February 2012 according to the Bureau of Labor Statistics.  Which is closer to the Great Depression unemployment rate.  And explains how a ‘recovery’ can be ‘jobless’.   Because it’s not a recovery.

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