One of the great things about having a business partner is that you have someone to challenge your thesis. Since their name (as part of the company) is associated with your work, they have a right, if not an obligation, to offer their thoughts.
Such was the case recently when Kevin and I were discussing employment trends in various economic sectors. As the stock-picker in our firm, Kevin develops some excellent insights via the company-level research he conducts. His work, we’ve discovered, is useful in validating or debunking impressions that I get of the economy and markets from my perch at 30,000 feet. Last week our discussion led us to compare company- and industry-level employment trends with those that I’ve observed, and reported on, at the national level; in particular we investigated Kevin’s suggestion that the broadest measure of unemployment, known as the U-6 rate (its line number on the monthly report) is too subjective to be taken seriously. Since the U-6 rate includes those who are “under-employed”, Kevin asserted, it’s subject to inflation by jobseekers who feel the employment market isn’t valuing them fairly.
Our discussion led me to investigate the historical relationship between the “headline” unemployment rate and other alternative measures of labor underutilization:
- The U-3 or “headline” unemployment rate
- The U-4 rate, which adds “discouraged” workers, who have a job-market related reason for not looking currently for a job
- The U-5 rate, which adds all other “marginally attached” workers
- The U-6 rate, which adds those employed part-time for economic reasons
Below is a graph showing the trends of each of the above measures since January 2007. Each has obviously risen sharply as the recession took hold. However, note that the “headline” U-3 unemployment rate (white line), the U-4 rate (red) and U-5 rate (yellow) have all risen more or less in concert with one another. The margin between those measures has remained fairly stable during the rise in unemployment, suggesting that the proportion of workers now feeling “undervalued” or “discouraged” is about the same as it’s been for the past three years.
- The U-4 rate is 105% of the U-3 rate, in the middle of its 3-year range (103.5% to 106.5%)
- The U-5 rate is 114% of the U-3 rate, at the low end of its 3-year range (112 percent to 122 percent)
The U-6 rate, the topic of our internal debate, is another matter, and interesting to observe. It stands now at 173 percent of the “headline” U-3 rate, at the low end of its 3-year range (172 percent to 186 percent). The proportion between these to two rates was highest in May 2007 – before the recession took hold. After bouncing sideways for about two years, the proportion has headed significantly lower since March 2009, perhaps as the availability of temporary and part-time jobs was curtailed.
Curious about the impact of temporary employment, the variable included in U-6 that’s not in U-5, I charted the difference between the two measures. The graph reflects the growth in the number of workers forced from permanent to temporary employment. That measure currently stands at 5.9 percent of the civilian labor force, or about 9 million Americans. While it’s probably true that some workers choose part-time or temporary jobs for their flexibility, it’s unlikely that there’s the degree of subjectivity in the U-6 that we were concerned about.
That, I believe, is the real value of the U-6 underemployment figure: It includes those American workers who’ve been forced to work part-time or in a temporary job and whose hours are, in my view, likely to be extended before companies begin to hire full-time workers in earnest.