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Although Bloomberg sees evidence that some parts of the U.S. are already in the grip of recession, by most accounts the U.S. economy is doing well in 2019. For most Americans, the most important aspect of “the economy” is whether they have a job. In August 2019, the unemployment rate was 3.7%, far below the ten-year high of 10% in October 2009 and barely more than the low of 3.6% reached in April and May this year. That’s certainly a good sign, but what does the unemployment rate tell us?
The official unemployment rate cited by the U.S. Department of Labor is the U-3. It counts only people who have been actively looking for work within the past four weeks. This narrow definition of “unemployment” excludes a lot of people who are not working a full-time job.
Multiple Measures of Unemployment
There are several methods for measuring unemployment. While U-3 is the number used for official unemployment statistics, many economists consider the U-6 to be a more meaningful measurement. The U-6 rate includes “persons marginally attached to the labor force, plus total employed part-time for economic reasons” as a percentage of those working. In other words, in addition to those actively looking for work, it includes people who are underemployed at part-time jobs and not eligible for unemployment benefits. In August 2019, the U-6 rate was 7.2%.
But even the U-6 is incomplete. Because “searching for a job” is still limited to the past four weeks, those who become “discouraged” or “drop out” —often because there aren’t even part-time or contract jobs to apply for—are still unemployed but are not counted as a part of the labor force. The U-6 rate also excludes anyone who chooses unemployment – for example, parents who opt to stay home to save money on childcare and older workers who have “retired” because they couldn’t find work.
Whether you use the U-3 or U-6, the national unemployment rate is near its 50-year low. Any national rate will obscure local realities. In Vermont, U-3 unemployment is only 2.1%, while Alaska’s rate of 6.3% is near twice the national average.
Both U-3 and U-6 are calculated relative to the labor force participation rate. This number represents the percentage of the population (16 years and older) that is either employed or actively looking for work. Even many employed people don’t count – for example, active-duty military personnel and green card workers.
In a strong economy, most people would expect a high labor force participation rate and a low unemployment rate. However, like the unemployment rate, the labor force participation rate is 63.2%, close to its lowest point in decades. The low number is partly explained by more Americans going to college and living longer into retirement. A weaker economy and employment barriers can also be contributing factors (remember the “discouraged” unemployed).
Does Low Unemployment = Strong Economy?
For all its limitations, the unemployment rate is a useful indicator of national economic health. The economy is, for the moment, continuing its years-long pattern of slow growth, minimal inflation. Real wages are also on the rise – just barely, by about 2.4% since 2016. That’s about half the rate of increase seen during the previous three administrations, even with the Great Recession.
In recent years most of the job growth was in low-wage, temporary, and benefits-lacking positions such as in retail. But current job gains are led by professional and business services, followed by construction and health care, with a decrease in retail jobs. These gains take place amid recession warning signs, however.
Job gains are meaningless to the individuals who find themselves among the unemployed. If you have recently lost a job, you are probably less interested in being counted than in finding out if you are eligible to claim unemployment. Navigating the unemployment system can vary depending on which state you are in. Unemployment benefits are usually reserved for those who have been laid off, but under certain circumstances, people who quit can be eligible for unemployment compensation.
During the last recession, it was not uncommon for a job search to last more than 40 weeks, and unemployment benefits were extended through an emergency program. But as the economy recovered, extended unemployment was rolled back. Current unemployment benefits vary by state, but 26 weeks is the standard.