Monthly Archives: November 2014

Macro Focus – The “Real” Unemployment Distortion

Thurs, NOV 20th, 2014

This morning I came across a great chart from the Atlanta Fed (via Pedro da Costa). It contains a 14-year view of the broader measures of unemployment in the U.S. labor market. I thought it worth sharing because recovery skeptics and political partisans alike often cite the U-6 number in order to justify their morose views. It typically goes something like this: Well, real unemployment is much higher than the official unemployment rate so things are actually really bad. Some folks even go as far as to suggest nefarious behavior on the part of economists, the government, the media, and that we’re all being duped (perhaps more infamously)! They’re right about one thing – at present U-6 is in fact higher than U-3. However the conclusions they draw from this are both incorrect and misleading. My push back has always been: Yes , U-6 is higher – but it always is, that’s not new to this cycle; what’s important is the delta and how it’s trending.

The answer to both is that 1) the present delta isn’t all that scary with historical context, and 2) the directional trend is encouraging. This is particularly laudable given the severity of the financial crisis. The Atlanta Fed chart nicely demonstrates this fact.

To wit, currently there remains a +5.7% spread between U-3 and U-6. Yet this is a mere +0.90% wider than pre-crisis levels when we were at full employment and nobody whined about “real” unemployment being symptomatic of a phantom economic recovery, especially in jobs. What’s more, U-6 has dropped faster than U-3 from their respective peaks (-5.6% vs. -4.1%). Nevertheless I profoundly recognize that this gap needs to further narrow for the benefit of American families and a healthier labor market in the aggregate (including its help in placing upward pressure on wages). And I believe it will over time given the underlying trends that I am seeing in the economy.

Indeed, this U-3/U-6 spread represents a good portion of the “under-utilization” that the Yellen Fed is intently focused on. However, the thrust of this blog’s point is that the (negative) significance of the “real” unemployment number in this recovery is dramatically overstated.

Jason L. Ware, MBA / Deputy Chief Investment Officer
Albion Financial Group
(801) 487-3700