The Real Unemployment Rate?

Discouraged, disgruntled, and under the table

Dr. Finlay, I read that the real unemployment rate is higher than what the government tells us.” I thought, “she’s come across some crackpot story.” It was not long after the recession of 2007-2009 and the unemployment rate was still high.

“The ‘real’ unemployment rate? There’s no such thing.”

NOTE: The US is not in a recession!

But she brought the article to the next class. After a quick skim I said, “this is worth talking about in class.” The idea that there is a “higher” unemployment rate, and the government is misleading us was also at the heart of that argument with my brother. So let’s get into the unemployment weeds for a moment, by way of the money supply.

M1 and the money supply

If you read the posts on inflation, you came across the term M1. M1 is the narrowest definition of the money supply—cash plus what we hold in checking accounts. There are other broader measures of the money supply. M0 through M2. [1]

Similarly, there are different definitions of unemployment from U-1 to U-6. U-3 is the number I refer to when I report the unemployment rate. U-3 estimates the percent of workers who are out of work and have made a “specific” attempt to find work in the last four weeks. My student was talking about U-6.

U-3, U-6, and the unemployment rate

U-6 estimates the percent of workers who are unemployed, underemployed, marginally attached to the labor force, or discouraged. [2]

Let’s go back to two of the people from our list:

1. Jamie keeps looking for work, taking any job he can get, for as many hours as he can. He never completed high school and is currently working about 10 hours a week as a janitor for a small shop. Jamie keeps looking for a better job with more hours.

2. Silvie was laid off from her job as an administrative assistant but hasn’t found work in over a year. She has her GED but finds it difficult to learn the skills she needs to find a decent job. Silvie’s stopped looking, but still wants to work.

Underemployed workers, like Jamie, want full-time work but can’t find it. The problem arises when a worker is structurally unemployed or when the economy is in recession.

During recessions, employers may reduce the number of hours they offer to some or all employees. This happened during the last recession (2007-2009). A former student told me she had to take “furlough days.” But she still had to work those days. When I convinced her that she’d just taken a pay cut, she left in a huff, saying, “my boss is going to explain this.”

Companies do this because finding new employees is expensive and time-consuming, but if business is down, they can’t always justify keeping everyone at full pay. Offering reduced hours will get some employees to leave to seek new work, with the hours they need.

Those who have looked for work in the past year, but not in the past four weeks are marginally attached to the labor force. Caregivers often fall into this category. They may only be able to work when they can get someone else to cover for them at home.

Discouraged workers are those who believe they don’t qualify for jobs or who believe that there aren’t any jobs available. In our list, Silvie falls into this category.

The BLS keeps track of these people using U-6. But since the numbers closely track the standard estimate of unemployment, U-3, the government and the Fed use the more restrictive estimate for decision-making purposes.

Problems measuring GDP

When we measure GDP and unemployment we have another problem. We can’t include unpaid work in the home, illegal and under the table work, and production by undocumented workers.

Putting a price on the value of housework and unpaid labor is difficult. For example, changing work from unpaid to paid might cause the demand for cleaning and childcare services to fall. Falling demand leads to lower wages.

Some people want payment under the table work to avoid taxes. Some of the work may not meet codes or regulations and is harmful. The production of illegal work is also harmful to the legal participants in the economy. Think drugs and theft.

(I had a student who prepared taxes for a thief. The thief put self-employed on the line that asks for occupation!)

Undocumented workers add to the economy by working off the books. They add to production as housekeepers, nannies, and farm help. In 2002, I did taxes for a few of these. They got taxpayer ID numbers and paid their taxes, so that the government would consider them for the next general pardon.

That never happened.

Thank you for reading,
Nikki

Note: In the next few posts, I’ll look at what causes recessions and what some of the problems are. As well as short-term and long-term solutions.

[1] Here’s a list of the other measures:

M0 measures real cash in circulation and bank reserves.

M2 includes M1 plus short-term time deposits in banks and money market funds. 

MB, or money base, is the total supply of currency plus the stored portion of commercial bank reserves at the central bank. Both M0 and MB are incorporated in M1 and M2.

[2] Investopedia list the other measures:

U-1: The percentage of people unemployed for 15 weeks or more

U-2: The percentage of people who lost their jobs and anyone who finished a temporary job

U-4: The total number of unemployed people, plus discouraged workers

U-5: The total number of unemployed people, discouraged workers, and other marginally attached workers