As of yesterday (8 November), the US unemployment rate (U-3) released for October was 7.3%. The September 2013 figure was 7.2%. While this indicates an improvement if we compare to a year ago (7.9%), I would not place much reliance on this figure. The U-3 is calculated as follows: jobless workforce who is actively looking divided by total available work force. This calculation can send a false signal of an improving economy if the denominator in the calculation is reduced due to declining economic factors.
Taking a grain of salt with the U-3, here are some other effective ways to gauge economic health from an employment standpoint:
- U-4: This is the U-3 plus discouraged workers, who have stopped looking for work.
- U-5: U-4 plus other “marginally attached workers” who would like to work, but have not looked recently.
- U-6: U-5 plus part time workers who want to work full time. This is a great indicator of underemployment and is a comprehensive metric measuring discouraged workers, marginally attached workers, and underemployment. Tracked since 1994.
- Employment Population Ratio: This measures the percent of the US adult population that has a job.
- Labor Force Participation Rate: This is the percentage of the civilian workforce that is working or seeking employment.
- Long Term Unemployment: Analyzing the BLS “Unemployed Persons by Duration of Unemployment” can be a good indicator of structural versus cyclical unemployment. Look at the segmentation of the weeks out of work and the overall average of weeks unemployed.
Using some of the above metrics, the U-6 would tell us that the combined unemployment rate actually is 13.8%. This measure has stayed above 13% since 2009. Since 1994, we have not seen anything close to this until the economic crisis of 2008. On a positive note, the U-6 has decreased since the height of the crisis, but it appears to be stuck at a very high level which does not bode well for the economy.
The Employment Population Ratio is currently at 58.7% and has been stuck around this figure since about Q3/Q4 2009. This is close to the lowest level since the early to mid 1980s. This is a poor indicator of overall economic health and some of it can be explained by demographics. There is an aging population (Boomers) who are retiring out of the workforce. However, it also indicates a structural unemployment where there is a disconnect between the skills demanded by employers and the skills supplied by the workforce presently.
The Labor Force Participation Rate is currently at 62.8% and this is the lowest level since 1977. This indicates about 720,000 people dropped out of the labor force from September to October 2013. However, the level I’m concerned about this figure will be dependent on the November BLS figures, as the government shutdown could have played a role into the figure for this month.
Analyzing the Average Weeks Unemployed gives us an average duration of weeks of 36.1. If we take this figure historically, this is a level not seen since 1948 (if we exclude the economic crisis of 2008). While we have seen small improvement since 2011, this indicates a fundamental mismatch between the skills supplied versus the skills demanded in the workforce. Also, this is an indicator that the ratio of unemployed worker to job vacancy is very high, prolonging their unemployment.
Summary:
If you pay attention to the political talking points and news, you may believe the employment and economic situation is not all that bad. Unemployment has fell throughout the year and that means we are seeing progress, right?
Well, if you take some of the aforementioned measures into account, this paints a much bleaker picture of the job market. For example, the employment to population rate shows that there has been no material improvement over the past three years. Additionally, this rate coupled with the U-6 and the Labor Force Participation Rate indicate a potential high level of structural unemployment and a high ratio of applicants to job vacancies, which we are not addressing with any of stimulative measures.
