By Marc Chandler, Global Head of Currency Strategy, Brown Brothers Harriman
This Great Graphic was posted by Ritchie King on Quartz. It succinctly provides the various components of the US labor market. There is no “real” unemployment rate. The Bureau of Labor Statistics has six different measures and they each measure a different aspect of unemployment.
U1 measures the percentage of the labor forces that is without work for 15 weeks or longer Percentage of labor force unemployed 15 weeks or longer.
U2 measures the part of the labor force that lost jobs or finished a temporary work assignment. Percentage of labor force who lost jobs or completed temporary work.
U3 is the official measure of unemployment as defined the the International Labor Organization and allows for international comparisons. This definition includes people without jobs but have actively been looking for work over the past month.
U4 adds to U3 those that have stopped looking for work because they are discouraged in the sense that they do not believe jobs are available for them.
U5 adds to U4 other people who would like work but have not looked for a job recently.
U6 is the broadest definition of unemployment and it adds to U5 part-time workers who would like full time work but cannot due to economic reasons.
Many critics of government policy on the political right and left want to use a broader definition than the official measure (U3). It is quite clear by comments from both Department of Labor and Federal Reserve officials they are well aware of the dimensions of the unemployment problem not incorporated into the U3 measure.
However, rather than trying to change the official measure, critics may be better served by questioning the 6.5% U3 unemployment rate that would be one signal to begin tightening monetary policy. This is exactly the line of argument offered by Chris Farrell in a recent Bloomberg Businessweek article. Farrell argues that the goal of policy should be a 3-4% unemployment rate, though recognizes this cannot be achieved by monetary policy alone.