U.S. Underemployment: Taking a Look From Multiple Angles

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For most people following day-to-day news, the unemployment rate is just a single percentage that explains how the labor market is doing. As of January 2019, the rate was at 4.0%, highlighting the high levels of employment in the United States currently.

This official unemployment rate, more formally known as the U-3 unemployment rate, only provides a partial story though. By definition, people who are not in the labor force (retired, full-time student, not actively seeking employment) are not factored into the calculation. Only those who are out of work and actively seeking employment are counted as unemployed. Therefore, there is a large number of people not working who are not factored into the U-3 rate, although the majority of these people are voluntarily out of jobs (retirees make up the majority of those out of the labor force).

On top of this, the U-3 rate puts those working full time and those working part time within the same category of employed. Although these workers do indeed all have jobs, many working part time are likely qualified for full time jobs and would prefer full to part time. These workers are what we call the underemployed since they want to work more hours and are qualified for higher paying, full time work.

As you can imagine, a high number of underemployed workers would signal a major weak spot in the U.S. labor market. If these workers were to get full time jobs that better suit their skill sets, a large chunk of Americans would see higher take home pay and thus be able to put more money into the economy.

Other unemployment figures besides the U-3 rate can help better understand where the labor market is in regards to underemployed workers.

The U-6 Rate

The U-3 unemployment rate is not the only unemployment statistic released in the monthly federal jobs report. The more comprehensive U-6 unemployment rate factors in underemployed workers stuck in part time jobs. For January 2019, when the U-3 unemployment was 4.0%, this U-6 rate stood at 8.1%. Before diving more into this, it is important to note that the U-6 rate has always been higher than the U-3. This can be seen in the figure below from macrotrends.net.

u6-unemployment-rate-2019-02-26-macrotrends (1)
Source: https://www.macrotrends.net/1377/u6-unemployment-rate

 

The important trend is the widening gap between the two rates. The current expansion, standing at 116 months long, is comparable in length to the the expansion of 1991-2001, which lasted 120 months. In April 2000, when employment for the 1990’s expansion peaked, the official U-3 stood at 3.8% and the U-6 stood at 6.9%, a gap of 3.1 percentage points.

The gap for January 2019, with a 4.0% U-3 and 8.1% U-6, was 4.1 percentage points. After comparable length expansions, the current gap between the U-3 and the U-6 is a full percentage point larger than the gap in April 2000. With a labor force of 163 million people as of January 2019, one full percentage point comes out to 1.63 million underemployed individuals.

If the U-6 were lowered so that the gap with the U-3 was at a level similar to the 1990’s expansion, 1.63 million more people would have better paying jobs, likely working more hours than where they currently stand. This labor market slack from relatively higher underemployment can be looked at in both a positive and negative light. Let’s start with the positive side.

Room to Grow

Underemployment can be looked at positively if you look at it as a sign that the economic expansion has room to continue its upward trajectory. Let me explain.

Headlines for the past few months have been warning about slowing global growth and greater likelihood of recession in the U.S. within the coming year or so. However, the strong labor market month after month will likely keep the U.S. economy growing even as other countries slow down and trade tensions with China continue. This comes from the fact that 68% of our GDP comes from personal expenditure.

If wages are rising and jobs are being created, then American citizens, whose spending drives the economy, will continue to have growing income to spend. Even though the official unemployment has reached historic lows, the relatively high level of underemployment provides room for the labor market to continue growing at a healthy pace.

Going back to the U-3/U-6 gap, now relative to 2000, those 1.63 million underemployed people that represent the 1 percentage-point larger gap would all take jobs that they are more qualified for if the jobs were available. These people thus provide a pool of potential workers for new jobs created by businesses. Even with low overall unemployment, there is still workers that businesses can hire to fill new positions.

This is part of the reason why there is still strong job creation even with the U-3 being at or below 4.0% for almost a year now. Every month that the U-3 has been at or below 4.0%, over 100,000 jobs have been created. Although this has happened in part due to more people rejoining the labor force, the availability of underemployed workers willing to fill a chunk of these jobs also plays a significant role.

So long as there are workers willing to fill new jobs, the labor market can continue to grow and the economy will continue to have the positive fundamentals needed for a continued expansion. The relatively high number of underemployed persons will help provide this pool of potential workers for the near future.

A More Negative Side. 

The positive side of the underemployment comes from its possible short term implications. If you focus more on what is causing it though, a more negative side arises.

A recent article in the Wall Street Journal brings to light an issue that has plagued the U.S. during the past few decades: workers’ falling share of domestic income. This refers to a decreasing amount of total output being returned to workers in the form of compensation, and an increasing share of domestic income going to businesses through higher profits. Workers’ share of income has been falling since the 1970’s, and has dropped off even worse during this expansion of the past ten years.

Economic theory states that high levels of employment should lead to higher wages as businesses compete for a shrinking pool of workers. However, even with near-record-low unemployment, this has not been happening during the past 10 years. Wages are growing around a 3% year over year rate, well short of the 5-6% growth rates seen in expansions prior to 2000.

Economists attribute this to a few things. They point to the drop off in union participation, which quells workers’ negotiating abilities. They also point to globalization, which gives the upper hand to large firms like Walmart and Amazon that can gain access to cheaper labor abroad and have better access to labor-replacing technologies and robots.

The relatively higher levels of underemployment can be tied into both of these points. Workers have less of an ability to negotiate higher wages and better hours without union support, causing more people to be stuck in part time, lower wage jobs. The dominance of superstar global companies and the continued adoption of labor replacing tech and robots has taken away a significant amount of lower skilled manufacturing jobs, forcing many into lower paying, part time work.

With these factors combined together, we see a larger number of underemployed people now as compared with past expansions. As a result, many of these workers receive a smaller slice of the economic pie than they would have in past decades. This has made many middle and working class Americans worse off now as compared with the past.

Taking this perspective, the higher underemployment seems like something that will persist, even as jobs are continuously created. If you are focusing more on the negative causes of underemployment, it would appear to be a representation of the shifting geography of American jobs.

It Depends on Your Angle of Looking at It

Higher underemployment can be looked at with a glass half full perspective and be seen as room for economic growth within the next year or two. However, it can also be looked at with a glass half empty perspective as an example of the weakening of the American middle class and a cause of wage stagnation. It depends on the mindset you look at it with.

I personally look at it from both angles. These underemployed individuals have largely been left out of the expansion, but also represent possible growth for the U.S. if we focus on the right policies. Getting into pro-growth policy for lower class Americans is a topic for a different post, though, so I am not going to go into that any further.

Taking the time to look at all of the possible angles for economic matters is important for understanding the whole picture. Hopefully, these varying perspectives have helped add a new angle to the way you look at unemployment.

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