Labor Market Diagnosis: The Underemployed States of America



The total number of employed adults in the United States was unchanged in November, according to a December 5 report from Gallup. Gallup calculated a payroll-to-population rate of 43.7 percent for the month, flat compared with October and November 2012. This is down from a high of 45.7 in October of 2012 and above lows of 41.7 registered at the beginning of 2011.

The payroll-to-population ratio, which is a measure of the percentage of the total adult population that is employed full-time, is an alternative way to measure unemployment. Gallup has been tracking this metric since at least 2010, and some economists have argued that the Federal Reserve should target a measure of full-time employment such as the payroll-to-population ratio instead of headline unemployment because of a number of problems inherent in the headline unemployment measure offered by the U.S. Bureau of Labor Statistics.

Perhaps the biggest problem with the headline unemployment rate is that it can be misleading, and it often paints a rosier picture of labor market conditions than is called for. The headline rate doesn’t include marginally attached or discouraged workers — those who are underemployed and those who have given up on searching for a job, respectively. 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.

On Friday, the BLS will release the 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 labor force — defined by the BLS as the set of Americans who are both eligible and willing to work — are actively seeking employment. In October, this totaled 11.3 million people, or 7.3 percent of the American labor force.

As of October, the labor force participation rate was 62.8 percent, down 0.4 percentage points from September and 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.

Since the headline unemployment rate offers an incomplete picture of the labor market, observers often turn to alternative metrics, such as the payroll-to-population rate. The BLS also maintains an employment-to-population ratio, which declined 0.3 percentage points in November to 58.3 percent.

Another 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. In October, this rate was 13.8 percent, 0.2 percentage points above October but below post-crisis highs of 17.1 percent, recorded in 2009 and 2010.

Gallup also tacks underemployment. Gallup defines its underemployment rate as “the percentage of adults in the workforce who are unemployed or working part time but looking for full-time work.” In November, this rate increased 0.8 percentage points to 17.3 percent.

Economists are expecting Friday’s BLS report to show a 0.1 percentage point reduction in the headline unemployment rate to 7.2 percent, and a payroll increase of 180,000. The ADP National Employment Report showed 215,000 payrolls added in November, which compares against a six-month average gain of 181,000.

Gallup Underemployment


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