Measuring Unemployment in Minnesota and the U.S.

By Amanda Rohrer
December 2009

Unemployment in the United States can be a controversial topic – and why not? Stocks rise and fall on the published unemployment rate, states are eligible for aid based on their measured rate, and nonprofit agencies and public projects are initiated all on the basis of measured unemployment. Since the government began tracking unemployment in 1940 as part of a Works Progress Administration (WPA) project, economists, politicians, and the public have been arguing about how to define unemployment. Some have claimed that anyone facing any kind of loss of income should be counted, since most people rely on every dollar they earn, while others have argued that unemployment should be narrowly defined to extended periods without work to ensure that the measure doesn’t unintentionally record periods of high volatility and turnover in the labor market as if it were economic stress.

The calculation of the unemployment rate has evolved over time, but the definition has remained the same. The unemployment rate, expressed as a percentage, is the proportion of the labor force that is unemployed. To be in the labor force, a person must be 16 or older and meet the requirements of either being unemployed or working for pay or profit. So a 14-year-old who is hired by neighbors to mow lawns and shovel snow is not in the labor force, while a retired person who supplements income with a few hours a week working in a retail store is. To be counted as unemployed, a person must be at least 16, must not have worked in the reference week, and must be actively seeking work or waiting to be recalled following a temporary layoff. This definition was selected because it is moderate and has strengths of both of the more extreme positions, and because measuring it is relatively unambiguous. Unemployment definitions that require people to be out of work for a set number of weeks are complicated when people supplement their incomes with short-term temporary work, and definitions that include everyone working part-time or in lower-paid work than they’re qualified for relies on people to self-report their job-seeking efforts and qualifications accurately. Moreover, keeping the definition consistent makes the unemployment rate more comparable through time.

Methodology

Calculated for the nation, the states, and selected local areas such as counties or metropolitan statistical areas, the unemployment rate is based in part on information collected in the Current Population Survey (CPS). The national unemployment rate and related statistics are calculated by the Bureau of Labor Statistics (BLS) using data obtained from the CPS. For state and local areas the Local Area Unemployment Statistics (LAUS) program produces the estimates by using the CPS data as one input into a larger model that includes more state-specific data since the CPS is too small to produce statistically reliable estimates for most states. All states enter into agreements with the BLS and use approved models and inputs which are appropriate for their circumstances to produce unemployment numbers. For more about the CPS, see below.

What is the unemployment rate used for?

One major use of unemployment rate data is in the allocation of federal funds. The American Recovery and Reinvestment Act (ARRA) allocated $787.2 billion of stimulus funds to be used on projects with the aim of preserving and creating jobs and spurring economic recovery. Of that, $192 billion is earmarked for aid to states and direct service programs for individuals in need, including funding for job training programs, food programs, construction of roads and infrastructure, and to improve public safety. Much of this was allocated, in part, based on state unemployment rates. An additional $308 billion is designated for discretionary spending, which is made available as contracts, grants, and loans to businesses, local governments, and nonprofit organizations. While the process varies, some of the applicants for funding will be required to note the unemployment rate in the area in which work will be completed and the potential impact of their project on unemployment.

Funding for many ongoing federally funded programs is also determined based on unemployment rates. For example, the unemployment rate is used to designate areas of substantial unemployment (ASUs), which qualify for additional federal assistance. Grant money, both through government and private institutions, is also often tied to unemployment rates. Grant applications may require the most recent unemployment rate for the target area and use that as a criterion for judging how well the project addresses the goals of the grant program.

The most frequent use of the unemployment rate, though, is as a broad indicator of the health of the economy. It helps to define policies and procedures and to dictate the direction that various institutions – all levels of government, private businesses, and investors – choose to go.

Alternate Measures

Although there is only one official unemployment rate, in the 1970s the BLS began publishing supplementary measures of unemployment to address different needs and uses for the unemployment rate. Today the official unemployment rate is one of six published measures of unemployment. They range from least inclusive (U-1) to most inclusive (U-6), and the official rate is included in the scale as U-3. Though originally only available nationally, the BLS recently began publishing these alternate measures for states. Since the primary purpose of the CPS is to produce the national unemployment rate, the sample sizes at the state level are much smaller, resulting in more volatility at state and local area levels. The alternate unemployment rates that are now being published for states are released quarterly and are 12-month averages to minimize that volatility.

Other than the official unemployment rate, the U-6 (sometimes described as the underemployment rate) gets the most attention (for definitions of U-1 through U-6, please see Table 1). The U-6 includes the unemployed, the marginally attached, and all people who are employed part-time for economic reasons. Workers who are marginally attached to the labor force are people who wanted to work, were available for work, and had looked for a job sometime in the prior 12 months but not in the past four weeks. This includes discouraged workers, the subset of the marginally attached workers who stopped looking for work because they believe none is available for them, as well as other marginally attached workers who may have stopped looking for work because of a lack of adequate transportation or child care. In Minnesota, discouraged workers make up on average just over 30 percent of those marginally attached to the labor force. Those employed part-time “for economic reasons” are people who would prefer full-time work but accept a part-time position because it’s the only work they can find, or who have had their hours cut to fewer than 35 per week after having been hired as a full-time employee.

Over the course of the recession, the unemployment rate in Minnesota has increased along with the national unemployment rate, but Minnesota’s rate has generally stayed lower than the national rate (see Table 2). The same trend is evident in the U-1 through U-6 rates, suggesting that Minnesota employers are coping with the recession using similar strategies to employers elsewhere.

The major disadvantage of the U-6 is the difficulty of measuring it. The CPS relies on individuals to self-report or report their household members’ economic activities accurately. While the CPS’s questions are designed to be as clear as possible in categorizing workers, the U-6 indicates what the worker wants rather than what he or she does, so there’s more ambiguity than in the official unemployment rate. Part-time workers hoping to get full-time work with their current employer, or to leverage their experience once they’ve worked a longer time, may not be making any specific efforts right now to find full-time work. People may say they want a second job or full-time work but have not gotten around to starting a serious job search, which may be counted by the U-6 if they say they’ve searched at some point in the last year. Also, the self-employed may not be counted as underemployed if they’re working but handling fewer clients or projects than usual, and people who enter graduate school or other training programs when frustrated by a lack of work would be excluded from the labor force as unavailable to work. The intent of the U-6 measure is to give an idea of how many people are only partly served by the labor market, and it does. But it doesn’t provide quite as much clarity as is sometimes attributed to it.

Despite concerns by the public that the unemployment rate doesn’t capture the true state of the economy and the economic circumstances of individuals, comparisons through time indicate that, for the most part, all of the various unemployment measures follow similar patterns of growth and decline. What this means is that, while it could be argued that the official Minnesota unemployment rate of 7.6 percent in October understates the proportion of the population feeling the effects of the recession, relying on the U-6 wouldn’t generally yield significantly different month-to-month changes or long-term trends in unemployment. In the last six months, however, there has been a slightly diverging trend with the U-6 growing marginally faster than the other measures (see Chart 1). This is true nationally as well as in Minnesota.

While the U-1 through U-6 are all consistently measured and published for use by the public, the U-3 is the only official unemployment rate. For government programs and allocation of funds, all states are gauged by the U-3, putting them all on equal footing. Other measures are useful in taking a more in-depth look at the health of the labor market.

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