U3, U6, & the Participation Rate

I've been having a running conversation with a friend of mine regarding how dire the employment situation really is. She believes that BOL statistics do not reflect the reality that so many people's unemployment benefits have expired or they have simply stopped looking for work.

Just so you don’t think I’m being a cheerleader or a naïf when it comes to government statistics or the broad economy, I decided to do a little hunting and digging. Several years ago, I used to post and debate things on Slate in the Moneybox forum and there were a few of the posters that were engaged in an ongoing and occasional effort to tease out what exactly the statistics meant. One of the things that was brought up several times was the “participation rate” which is exactly what it sounds like – what percentage of the available labor force is engaged in work.

Anyhow, I dug back into the BOL website and found the participation rate series and then compared it to both U-3 and U-6 measures. U-3 is the most reported measure of unemployment but, as you note, it doesn’t quite capture all unemployment. U-6 is a much broader measure and counts discouraged workers, marginal employment, etc.

So here’s a chart:
The participation rate and U-3 series go back all the way to 1950, whereas the U-6 line is a recent development - I believe when the BOL started changing the calculations a bit. The participation rate obviously reflects some basic shifts in work patterns such as more women entering the workforce. This rate peaked out in early 2000 at 67.3% and has since fallen back to around 66%.

I disagree with the statement that BOL statistics do not in any way capture people whose unemployment benefits have run out. I believe that the participation rate does capture this even if they are missed by the counts of initial and continuing claims or the U-3 measure.

The peak labor participation rate was 67.3% in April 2000 and the U-6 (not seasonally adjusted) measure was 6.6%. During the December 2006 trough in U-6 measure was 7.8% but the participation rate was 66.4%. This is a difference of -0.9% from the April 2000 peak and the U-6 measure difference is 1.2%. I don’t believe this is a coincidence, particularly considering the noise in the data.

Bottom line, I agree that U-3 most likely understates the true unemployment situation but I disagree that workers that are no longer collecting unemployment benefits are not counted. The numbers are simply not reported by a lazy and stupid press corps who are either not trained or constitutionally incapable of digging into statistics and attempting to draw a conclusion.

Tangents and Digressions:
I didn’t include it here but I’m very curious if that increase in participation rate in the late 80s and 90s overlaps with any real wage stagnation. An increase in the labor pool would logically depress or at least slow wage growth. Of course, that makes our current situation even more dreadful since the labor pool via participation rate has already shrunk and wages have, if anything, shrunk on a real dollar basis.

I don’t think it’s entirely coincidental that consumer revolving credit leaps during the lowest periods of participation rate: