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U6 Underemployment Rate Misunderstood

Jason Stipp

Jason Stipp: There are a couple of things that I wanted to talk to you about, that a lot of folks are pointing to as potential negatives, other negative indicators in the job market, and I think the biggest one that we hear a lot of folks talk about is this U6 rate. This is the rate that includes workers who are part-time who would want to be full-time, but they can't find the work, and otherwise marginally attached workers.

Can you first tell us a little bit about what does that U6 number encapsulate and why is it higher than the headline unemployment number?

Robert Johnson: It's meant to be a more comprehensive number. A way of looking at the job situation, and I think somebody will try to misuse the number a little bit. They'd try to say, well, when you really add all these components together you were as bad as the Great Depression, and that's just not true. I think there has been some work out. There was some academic work, where people have looked back and said, well if you constructed U6 the same way that it's constructed today, you'd be at something like 37%-38% unemployment rates on the U6 basis during the Great Depression. So, we are nowhere near that. Right now the number is about 16.6%.

Stipp: Okay. And that's an important point about U6 is that when you go back historically, you actually have to sort of rebuild it, because this figure hasn't been around for that long right?

Johnson: That's correct. That's what makes it hard to use this metric. It's only being around since 1990, and those were two relatively mild recessions coming out of that.

The interesting part of it is the two major components. The regular unemployment in working part-time, but really want to be working full time components are available back to the 1950s. Taking these two figures together and tracking them back, we can actually see that we were in a worse situation in the 1980s, in that recession. So, this is a new ground, I mean this number – unemployment goes up the U6 should go up. I mean, it's natural to say that, "well, we've got these other hidden unemployed people." No, no, that's not how to look at this number.

Stipp: You really have tried to compare it to past recessions and see what the trend has been there. This number U6 is always going to be higher...

Johnson: Right.

Stipp: ...than the headline unemployment number. So, it's how it was compared to past recession, you can figure that out, you can get a better sense.

Johnson: And one other thing I'd add on that is that, people who want to throw that all in unemployment, if somebody works 33 hours, that person gets – they are told to stay home one day in a week or something like that and get down to 32 hours. Well, that's a part-time worker. I mean, that may hurt a little bit, but that's not in any way, shape or form like somebody is completely laid off, it's a whole different world.

Stipp: So important to indicate that there could be some noise in those numbers as well.

The other thing that I've been reading about in a negative sense, and a lot of the bears will point to this as a potential problem, is the duration of unemployment, which seems to be especially long this time around. Is there any truth to the fact that unemployment is longer in this recession and what's behind that?

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Johnson: The duration of unemployment always gets longer during a recession, that's a given and natural, and like any other recession that's happened this time, but even longer term, there has been a trend towards longer and longer periods of unemployment, but less and less people are also laid off. In the 1970s, we laid off a lot of people. In fact, the layoff rate at our peak this time was practically the normal level for the 1970s, but the difference was those people were off of work for four weeks, eight weeks while they shut down a plant, adjusted this, and then they where all immediately called back, and unemployment this time around or overtime has gradually increased.

There are a few other things at work here. As the population gets older, you are going to see that duration naturally go up. 50-year olds tend to be unemployed for far longer than a 25-year-old. I mean orders—and almost an order of magnitude, so it's a big number.

And so that hurts the number. And obviously, as we get more tech oriented jobs, we'll require more training, people tend to hang on to people longer, people tend to stay a little bit longer on their jobs and people are very reluctant to hire somebody knowing they've got to do all this training to get that person up. So that's hurts the number.

And also the New York Fed did a study on the big dispersion in wages, has been a huge factor in increasing the duration of unemployment, where most jobs doing the kind of the same thing pay the same thing, well, now there is a bigger and bigger variety, just like there is every where else in our society, where we've gotten a bigger dispersion of numbers. And when people sense that, why should I take this $10 job as a temp somewhere, when I know if I wait long enough I can get the same job at the real company for $50 an hour in a month or two, why should I take the $10 in offer?

Stipp: So some people maybe holding out for that better job, because they are seeing that potential dispersion in their possible salaries?

Johnson: So there is a whole bunch of reasons for it.

Stipp: So, given that it does seem to be a trend that is real, should we be worried about it, is this something from an economic standpoint that we should wring our hands over? I mean, obviously, there could be some impacts from it from a societal standpoint, but as an economist how do you think about it?

Johnson: Well, I mean I think you hit it on the head. I mean the societal impacts are large. I mean you're going to cerate a group of very discouraged people that aren't going to be able to find jobs and do they break down the layers of society, so to speak. And I think that that's certainly a real and legitimate concern. And certainly to the people in that situation it's got to be exceptionally painful, and I feel deeply for the people that are stuck in that boat, where they've tried hard and now for no faults of their own really can't find something, because they are just don't have the right set of skills to do it.

So I think that that's – the worst of it is the societal thing. From an economic standpoint, I've always stressed, it's the total level of wages that really drives the economy. And from that, if the people that are working make a higher wage, or you've in general got a few more people working or you've got them working longer hours, you put those things together, and you get more dollars, that's what an economist really wants to track. So I am – I feel deeply for the long-term unemployed, and it is a really problem, but I don't think it's going to kill the economic recovery.

Stipp: Okay. Well, Bob, thanks so much for adding that extra context and some of those extra metrics when thinking about the unemployment rate. It's helpful if we're getting more of a complete picture.

Johnson: Great. Thanks.

Stipp: For Morningstar, I am Jason Stipp. Thanks for watching.