Friday, November 05, 2010

Broader U-6 Rate at 17%: The Long-Term Unemployed and the Dark Side of Jobs Report - Real Time Economics - WSJ

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Track the U.S. jobless rate from 1948, the earliest year with official data. Updated 11/05/2010

The U.S. jobless rate was flat at 9.6% in October, but the government’s broader measure of unemployment dropped slightly to 17%, possibly due to long-term unemployed dropping out of the labor force.

The comprehensive gauge of labor underutilization, known as the “U-6″ for its data classification by the Labor Department, accounts for people who have stopped looking for work or who can’t find full-time jobs.

The key to the decrease in the broader unemployment rate was due to a 318,000 drop in the number of people employed part time but who would prefer full-time work. That drop reversed part of last month’s big 612,000 jump. Meanwhile, the number of discouraged workers and those who classify themselves as “marginally attached” to the labor force also increased.

The broader rate decreased despite a decline of 330,000 in the number of people who are employed. That drop may sound strange considering the Labor Department reported the economy added 151,000 jobs in October. It’s important to remember that the unemployment rate and jobs numbers are calculated using separate surveys, and the often move in differing directions. The household survey, which is used to calculate the unemployment rate, also is much more volatile, covering a substantially smaller percentage of the work force. And some of this month’s weakness may be the result of earlier strength that stood in opposition to declines seen in payroll data.

Though the number of employed dropped substantially, the number of people unemployed only increased by 76,000 and the number of people in the total labor force declined. That kept the unemployment rate steady.

The 9.6% unemployment rate is calculated based on people who are without jobs, who are available to work and who have actively sought work in the prior four weeks. The “actively looking for work” definition is fairly broad, including people who contacted an employer, employment agency, job center or friends; sent out resumes or filled out applications; or answered or placed ads, among other things. The rate is calculated by dividing that number by the total number of people in the labor force.

The drop in the size of the labor force is likely an indication that many discouraged workers are just giving up. The labor force is only about 50,000 higher than it was in October 2009, but the population of working-age Americans who aren’t in the military or an institution, such as a prison or home for the aged, has increased by nearly two million people over that time.

The U-6 figure includes everyone in the official rate plus “marginally attached workers” — those who are neither working nor looking for work, but say they want a job and have looked for work recently; and people who are employed part-time for economic reasons, meaning they want full-time work but took a part-time schedule instead because that’s all they could find. People who drop out of the labor force completely aren’t included in this tally.

Further supporting the contention that people are dropping out of the labor force is the continued increase in the number of long-term unemployed. Following an 83,000 increase in October, more than 6.2 million Americans have been out of work for 27 weeks or longer. Anyone unemployed over 99 weeks has no access to unemployment benefits and many lose access even earlier. Once those benefits expire, the unemployed may stop considering themselves part of the labor force.

UPDATE: Ray Stone of Stone & McCarthy Research notes an important point about the October data that effects the shrinking size of the labor force. “The biggest source of decline in the October Labor force was due to workers who were employed in September exiting the Labor Force in October,” he writes. “Based on the participation rate data it would seem to be mature workers (age 45+) who have elected to either retire, or buy into early retirement packages.”

That doesn’t change the fact that the number of long-term unemployed remains at an extremely elevated level, and many may still be dropping out of the labor force. But it suggests that this month’s drop was due more to recently employed older workers leaving their jobs.
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