Unemployment Rates are No Conspiracy

The official definition of unemployment used by both the Bureau of Labor Statistics and economists world wide is: a person who is part of the labor force, actively looking for a job, but does not currently work.  This definition excludes people who are discouraged job seekers (that is, they would like a job but aren’t actively searching), students, prisoners, institutionalized people, military, stay-at-home parents, and retirees.

When some laymen (particularly those whose preferred political party is not in power) discover this definition, they tend to scream “conspiracy!” or “fraud!” But, as GMU professor Alex Tabarrok explains in this video, there is no grand conspiracy; it’s merely just one of six definitions used for unemployment.

In fact, if you look at the six unemployment rates takes together, they all move in the same direction.  That is because the unemployment rates measure levels.  Since all six track the same thing (unemployment), and that their positioning is important relative to previous points along the same line, and not to each other, one definition is a good as the next for discussing the trajectory of the trend.  However, one must be consistent in comparing previous time periods. The U-6 unemployment rate can only be compared to a previous U-6 rate.  Comparing it to U-1 through U-5 makes no sense.

Ultimately, choosing what unemployment rate to use is a matter of preference.  The U-3 rate (the official rate cited above) tends to be the cleanest of the 6; broad enough to get an idea of the trend but restricted enough to avoid a lot of the ambiguity that comes with the broader U-4, U-5, and U-6 measures.  But there is nothing wrong with using U-6, either.

Regardless of the method preferred they all tell the same story: the unemployment rate is falling.

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