Is America’s Headline Unemployment Rate too Optimistic?
On Friday, the U.S. Bureau of Labor Statistics will release its monthly Employment Situation report, which is the benchmark for the headline unemployment rate. Headline, or U-3, unemployment is a measure of how many members of the workforce — defined by the BLS as the set of Americans who are both eligible and willing to work — are currently without work and are actively trying to do something about it. In July, this was 11.5 million people, or 7.4 percent of the American workforce.
The health of the labor market is a top concern for every member of the U.S. economy, which is to say that it’s a top concern for everybody in the country. Labor, aptly enough, is what keeps the entire economic machine moving, and attaining “full employment” is something of a holy grail for monetary and fiscal policymakers. Seeking to satisfy that half of its dual mandate, the U.S. Federal Reserve has targeted an unemployment threshold of 6.5 percent, indicating that this is the rate at which it would become appropriate to consider tightening monetary policy — that is, raising the benchmark federal funds rate, which has been trapped at the zero bound for years.
At 6.5 percent, unemployment would be about one percentage point shy of what many economists estimate is full employment for the U.S., and the labor market would be healthy enough for the Fed to finally take its foot off the gas.
But while it’s convenient to use the headline unemployment rate as a barometer of labor market conditions, it can be misleading. The U-3 measure of unemployment doesn’t include marginally attached or discouraged workers — those who are underemployed and those who have given up on searching for a job. What’s more, the headline unemployment rate is sensitive to changes in the labor force participation rate, or the share of all adults who are willing and able to work, be they already employed or looking.
As of July, the labor force participation rate was 63.4 percent, substantially lower than its pre-crisis level of about 66 percent. This reduction in the labor force participation rate has helped reduce the headline unemployment rate without actually raising the overall level of employment or improving the health of the labor market. Declines in the labor force participation rate are common during and after major recessions as the long-term unemployed — who currently account for as much as 37 percent of the total unemployed — simply give up looking for work.
Because the headline unemployment rate offers an incomplete picture of the labor market, observers often turn to alternative metrics. One popular alternative is the U-6 unemployment rate, which counts not just those job seekers included in the U-3 (headline) rate, but also those who are marginally attached to the workforce (underemployed) and people working part-time for economic reasons. This measure of unemployment hit 14 percent in July, down from 14.3 percent in June and 13.9 percent in the year-ago period.
Another metric is the payroll-to-population ratio, which is a measure of the percentage of the total adult population that is employed full time. Gallup has been tracking this metric since at least 2011. Gallup reported on September 5 that its P2P ratio fell from 44.6 in July to 43.7 in August. These results, based on Gallup’s survey of approximately 31,000 Americans, suggests that despite the decline in headline unemployment, a larger share of the American population is without work than before.
Gallup also tracks workforce participation and its own variation of headline unemployment. In August, Gallup reported workforce participation of 66.7 percent, down from 67.7 percent in July, and an adjusted headline unemployment rate of 8.6 percent, up from 7.4 percent in July.