Thoughts on unemployment and the role of unemployment insurance.

What’s going on with the employment situation?

There’s some thorough analysis out there of the current unemployment statistics as reported recently by the monthly Current Population Survey. I want to focus on something more wonkish, and in-depth.

There are 6 levels of unemployment as reported by the BLS:

  • U-1, persons unemployed 15 weeks or longer, as a percent of the civilian labor force;
  • U-2, job losers and persons who completed temporary jobs, as a percent of the civilian labor force;
  • U-3, total unemployed, as a percent of the civilian labor force (this is the definition used for the official unemployment rate);
  • U-4, total unemployed plus discouraged workers, as a percent of the civilian labor force plus discouraged workers;
  • U-5, total unemployed, plus discouraged workers, plus all other marginally attached workers, as a percent of the civilian labor force plus all marginally attached workers; and
  • U-6, total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all marginally attached workers.

As Rea Hederman noted in his recent National Affairs piece, “What is Unemployment?”

For economists, these last two definitions of unemployment can help provide some insight into labor-market movements. In particular, the spread between U-5 and U-6 can show how quickly businesses are returning to normalcy after a recession, because it offers a way to gauge changes in the number of hours worked as well as in the number of workers hired. An increase in U-6, meanwhile, can provide evidence that employers are shifting more workers to part-time schedules in response to declining economic conditions.

Hederman notes that U-5 and U-6 have mostly limited utility beyond these narrow measures. They are often used, however, as a political tool to make unemployment sound worse than it is. However, I wanted to take up the thesis that there might be telling evidence about the health of the labor market recovery in examing the spread between U-5 and U-6. Implicit in the difference between U-5 and U-6 is that we are measuring “underemployment,” that is, the amount of people who are employed but are only working part-time because they can’t get the jobs they really want.

(Click to enlarge)

The chart above tracks U-5, U-6, and the spread between them, from the turn of the century to the present. As you can see, this recession led to a significant increase in the spread between U-5 and U-6, as more people were forced not only into unemployment, but also into part-time employment that they were stuck with due to the economic climate. As you can also see as well, the spread between U-5 and U-6 has not come down very much at all. One would imagine that a labor market in recovery would at allow people working part-time to get back into full-time. But it appears form the graph that the spread tracks overall employment, rather than serving as a leading indicator.

Curiously, there is a very strong correlation between the spread and the Insured Unemployment Rate (IUR), the ratio of continuing unemployment claims over the covered labor force.

(Click to enlarge)

I did a multivariate regression analysis of the average spread spread between U-5 and U-6 against the average IUR and Real GDP growth in Q/Q SAAR for each quarter beginning Q1:2000 through Q2:2010. First of all, I would have expected there to be a very high correlation between GDP growth and the IUR, but I only got less than .2. Second, I was surprised to see a correlation between the spread and GDP growth to be so low. NOTE: I don’t believe that running this again using Real GDP in constant prices would make much difference in this outcome. I would welcome a better method, however.

(Click to enlarge)

I’m not trying to imply causation here, but the relationship between the spread and IUR is very tight, and highly significant (P<.0001). I tried to control for confounding effects of GDP, and am still getting a very strong association.

The policy implication here is that if extending unemployment benefits does encourage slack in the economy, and the correlation between IUR and the spread holds, then we are potentially seeing the effects of perverse work incentives.

Clearly this is a humble analysis, and I am sure that we are seeing multiple effects at play. But such a strong association is at the very least an affirmation that we must think critically about continuing claims and the effect they have on labor force recovery,


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