Why Do We Use the Unemployment Rate?

Every month the Bureau of Labor Statistics releases data on the labor market in a release called Employment Situation. The first paragraph of the release is typically like this one from September 2008:

'Nonfarm payroll employment declined by 159,000 in September, and the unemployment rate held at 6.1 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Employment continued to fall in construction, manufacturing, and retail trade, while mining and health care continued to add jobs."

While the full report gives a host of labor market data, the introductory paragraph tends to use only two pieces of data - the change in number of people employed and the unemployment rate. When the media reports these figures, we are lucky if we are told both them. Often we only hear about the unemployment rate.

But is the unemployment rate really the best measure of the health of the labor market?

What the Unemployment Rate Measures

The general principle of how the unemployment rate is defined in the U.S. is described in How the Government Measures Unemployment:

"The basic concepts involved in identifying the employed and unemployed are quite simple:
• People with jobs are employed.
• People who are jobless, looking for jobs, and available for work are unemployed.
• People who are neither employed nor unemployed are not in the labor force.
The survey is designed so that each person age 16 and over who is not in an institution such as a prison or mental hospital or on active duty in the Armed Forces is counted and classified in only one group.

What the Unemployment Rate Doesn't Account For

The unemployment rate, while useful, does not take into account a number of important features of the labor market, including the following:

1. The fact that a person can be employed, but only be working part-time instead of full-time hours. We tend to see this kind of underemployment during recessions but it is not captured in the unemployment rate (though the two measures are likely to be highly correlated).
2. The fact that the unemployment rate only takes into account people actively looking for work. Those who are discouraged from working or see other alternatives, such as going back to school, as being preferable to working.
3. The fact that people may have taken a pay-cut to keep their job, or took a lower-paying job after being let go from their previous employment. We could have the same proportion of the population employed, but on average people are making less money.

Because of these factors, I think we can do better by looking at other measures of the labor market.

How to Measure What We Really Care About

In your standard supply-and-demand framework, we look at the outcome of market in two dimensions:

• Quantity
• Price

We can do the same for the labor market.

Quantity: Here we are not simply looking for the number of people working - we care about how many hours each person is working as well. We can measure this by simply adding up all the hours all Americans work each month. Call it "Total Hours Worked".

In the report the BLS has something similar called average weekly hours of production and nonsupervisory workers, but there are two important differences:

1. It is an average, not a total
2. The average does not take into account those not working at all

Total hours worked, as a single statistic, provides us with more information that either the unemployment rate or the average weekly hours of production on their own.

Price: We can measure this by the total dollar amount earned by all employees in the United States in a month. Call this "Total Wage Dollars Earned". Again, the BLS has a statistic similar to this called Average hourly earnings of production and nonsupervisory workers. It has the same drawbacks, though, that the quantity measure has:

1. It is an average, not a total
2. The average does not take into account those not working at all

Conclusion

I believe we need to change the type of statistics used in the media to measure the health of the labor market. By replacing the unemployment rate with two figures: "Total Hours Worked" and "Total Wage Dollars Earned" we can get a better feel for the health of the economy. We measure most other things in economics by looking at prices and quantities - why not the labor market as well?