Thursday, September 6, 2007

What's So Special about U6


Barry Ritholtz repeats the popular line that "real unemployment" is much higher than headline unemployment.

U6 is indeed higher than U3. The problem is that value in unemployment stats comes from comparing different points in time and throughout time U6 has always been higher than U3.

When one says, if the "real unemployment rate" was 4.6 the labor market would be tight, you are using your familiarity with U3 to call 4.6 a tight market. Even in the heyday of the late 90s U6 was above 7%. If U6 was 4.6 today the FED would be talking about moving the funds rate upwards 50+ basis points per meeting.

The BLS has data on U6 going back to 1994. The gap between U6 and U3 is procyclical and as one might expect lower now than the average of the last 12 years and only slightly above the roaring 90s.

12 comments:

barry said...

As I note in the post, "It is not that the unemployment rate is so very bad -- its just not nearly as good as the 4.6% we have heard the BLS report."

Why? I simply find it hard to imagine that real wages have not risen very much over the past few years, given the apparent shortage of workers a 4.6% unemployment rate suggests.

Yes, Globalization may have something to do with it -- but that only explains part of the relatively weak income gains

Karl Smith said...

It could also be the case that the natural rate of unemployment is dropping because of changes in the labor force composition.

For example the natural rate in the service sector is much lower than in manufacturing. The natural rate also declines as unionization declines.

Less manufacturing workers and less union workers imply a lower rate.

The clear corollary is that non-unionized service workers have less negotiating ability over wages

Anonymous said...

great site Karl , keep up the good work !!!


don't worry about Barry , he loves his merry band of Tin-Foil Hat conspiracy theorists -----he just plays to their insanity

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