Analysis of Change. 1 Economically speaking, the natural rate of unemployment is a theoretical concept, rather than an agreed upon

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1 Alternative Measures of Labor Underutilization Second Quarter 2017 By Paul Daniels Virginia Employment Commission, Division of Economic Information & Analytics *Note: Unless otherwise noticed, all figures and tables are produced from data provided by the Bureau of Labor Statistics (BLS), Local Area Unemployment Statistics program. Data on the Alternative Measures of Labor Underutilization can be obtained at the following website: Analysis of Change Covering Third Quarter 2016 through Second Quarter 2017, the most recent four quarter provides a mixed bag of support for the health of the Commonwealth s labor force. At the surface level, only two measures saw a decline in the second quarter, compared to four declining measures in the first quarter of the year. The two measures that declined were U-5 and U-6. Generally, unemployment figures move relatively slowly. They may be quick to rise during crisis, but during decline or periods of relative economic normality it is common to see several periods of stagnation. This is particularly true for the traditional unemployment measure, U-3, as it approaches the natural rate of unemployment 1. However, U-6 in particular has continued to decline steadily, with far fewer quarters of stagnation or increases during the postrecession return to its natural rate. This is to be expected as it had the largest increase during the recession, as more and more people saw hours cut, or were otherwise unable to obtain full-time employment. Looking at national figures, Virginia remains well below the national rate across all measures. Furthermore, the Commonwealth outperforms every state in the region, including West Virginia, South Carolina, DC, and Maryland on nearly every measure. The only exception is Maryland, which ties Virginia on measure U-6 with a rate of 8.4. All of these are promising as there is debate among politicians, economists, and the public at large as to the current state and possible future of the economy. As the nation settles into a new administration at the federal level, and Virginia prepares for an upcoming election, the Virginia economy (in terms of unemployment figures) is faring well. Turning to less positive figures, U-2, U-3, and U-4 all increased 0.1 percentage point from last quarter s rates. This is the second quarter in a row that U-2 has increased, suggesting that we are seeing an increase in the number of people losing their jobs. Based on how different underutilization and unemployment rates are calculated, they may increase as individuals remain unemployed for longer periods of time (as is the case in U-1) or as people become marginally attached as they stop looking for work (measures U-4 and U-5). For these reasons and others, measures U-1, U-4, and U-5 may increase and decrease, without the number of unemployed individuals changing. Increases in the U-2 rate on the other hand indicate that a greater number 1 Economically speaking, the natural rate of unemployment is a theoretical concept, rather than an agreed upon figure. It can best be understood as the level of unemployment that occurs when an economy is working at maximum efficiency. In other words, there is always a certain amount of unemployment, and the natural rate is said to be this lower threshold when frictional, structural, and cyclical unemployment are at their minimum. 1

2 of individuals are losing their jobs or completing temporary work. At the same time, the population is increasing and we would hope that with a healthy economy, those eligible would be able to find employment. While the consequences of U-2 s rise should not be overstated, it is important to address that while employment is increasing and the unemployment rates continue their overall downward trend, there is also a growing number of individuals becoming newly unemployed. Building from the previous discussion, the last four quarters have been somewhat more variable than the rest of the post-recession period. For instance, none of these quarters saw every measure decline. Moreover, three measures (U-2, U-3, and U-4) increased 2 out of the last four periods. Finally, while U-1 has not increased, it has also not decreased since the second quarter of At first look, these are indicative of a stalling economy that cannot adequately match the labor supply. However, caution should be urged before assuming such a dire scenario. As has been stated here and in previous iterations of this report, the seven years following the Great Recession have been a period of significant improvement in all alternative measures of labor underutilization, as Figure A clearly displays. Because recent quarters have been more tumultuous, may simply indicate that the economy is beginning to normalize. In other words, we would expect that as an economy begins to settle and is no longer in a state of recovery, the unemployment rate will remain steady, adjusting primarily to cyclical factors and unforeseen shocks. With this in mind, the recent ebb and flow of each of the alternative measures can be taken as a sign of reassurance that unemployment is exiting the post-recession recovery, and entering a more sustainable long-term state. The final topics of most interest are job-seeker discouragement and underemployment. As illustrated in Figure B, would be job-seeker discouragement has remained steady at 0.3 for the past three quarters. With this figure, the actual number is less useful than the overall trend. While discouragement remains slightly elevated from its pre-recession levels, its stabilization suggests that individuals success and perception of the labor market are improving. One reason for this may be the continuing improvement of underemployment in the Commonwealth. The underemployment rate of 3.4 percent is down slightly from last quarter, and is below the national. Furthermore, it is down significantly from the same time last year. In fact, other than a slight uptick at the end of 2016, the past four quarters have demonstrated a clear and lasting improvement for the first time since In summation, the story of unemployment and labor underutilization in Virginia continues to be a positive one. All measures remain below regional and national s, and continue to improve overall. While some measures have begun to show more signs of fluctuation, it is not necessarily bad news. Rather, it is likely that we are beginning to settle into a new stable labor market, moving out of one marked primarily by recovery. 2

3 Appendix Measurement Table 1: Alternative Measures of Labor Underutilization Current 4 quarter Previous 4 quarter (2016: II 2017: I) National Data Last year s equivalent 4 quarter (2015: III 2016: II) U U U-3* U U U * Measurement utilized as the official unemployment rate, defined as the total number of unemployed reported as a percentage of the civilian labor force Note: Quarters reflect calendar year and not Virginia s fiscal year. National Data is seasonally adjusted. Table 2: Underemployment and Job Seeker Discouragement Measurement Current 4 quarter Previous 4 quarter (2016: II 2017: I) National Data Last year s equivalent 4 quarter (2015: III 2016: II) Underemployment Job Seeker Discouragement

4 14.0 Figure A: Labor Underutilization in Virginia Percent of Labor Force annual 2003:III 2004:II 2004 annual 2004:III 2005:II 2005 annual 2005:III 2006:II 2006 annual 2006:III 2007:II 2007 annual 2007:III 2008:II 2008 annual 2008:III 2009:II 2009 annual 2009:III 2010:II 2010 annual 2010:III 2011:II 2011 annual 2011:III 2012:II 2012 annual 2012:III 2013:II 2013 annual 2013:III 2014:II 2014 annual 2014:III 2015:II 2015 annual 2015:III 2016:II 2016 Annual 2016:III 2017:II U-1 U-2 U-3 U-4 U-5 U annual 2003:IV 2004:III 2004:III 2005:II Figure B: Underemployment and Job-seeker Discouragement 2005:II 2006:I 2006 annual 2006:IV 2007:III 2007:III 2008:II 2008:II 2009:I 2009 annual 2009:IV 2010:III 2010:III 2011:II 2011:II 2012:I 2012 annual 2012:IV 2013:III 2013:III 2014:II 2014:II 2015:I 2015 annual 2015:IV 2016:III 2016:III 2017:II Underemployment Job-seeker Discouragement 4

5 Index Civilian Labor Force: All persons classified as employed or unemployed. Civilian meaning not living in institutions such as correctional facilities, long-term care hospitals, and nursing homes, and not on active duty in the Armed Forces Discouraged Workers: Persons not in the labor force who want and are available for a job and who have looked for work sometime in the past 12 months (or since the end of their last job if they held one within the past 12 months), but who are not currently looking because they believe there are no jobs available or there are none for which they would qualify Employed: Persons 16 years and older in the civilian non-institutional population who, during the reference week, (a) did any work at all (at least 1 hour) as paid employees; worked in their own business, profession, or on their own farm, or worked 15 hours or more as unpaid workers in an enterprise operated by a member of the family; and (b) all those who were not working but who had jobs or businesses from which they were temporarily absent because of vacation, illness, bad weather, childcare problems, maternity/paternity leave, labor-management dispute, job training, or other family or personal reasons, whether or not they were paid for the time off or were seeking other jobs. Each employed person is counted only once, even if they hold more than one job. Involuntary Part-Time Workers: Persons who are available and want to work full-time, but are forced to settle part-time work for economic reasons Job Losers: Unemployed persons who involuntarily lost their last job or who had completed a temporary job. This includes persons who were on temporary layoff expecting to return to work, as well as persons not on temporary layoff. Those not on temporary layoff include permanent job losers and persons whose temporary jobs had ended. Job-seeker Discouragement: A measurement of would-be job-seeker discouragement, calculated as the difference between alternative measures U-4 and U-3. While the actual figure is somewhat artificial and difficult to interpret on its own, the overall trend gives an idea of perceptions about the labor market. Marginally Attached Workers: Persons not in the labor force who want and are available for work, and who have looked for a job sometime in the prior 12 months (or since the end of their last job if they held one within the past 12 months), but were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey. Discouraged workers are a subset of the marginally attached. Marginally Attached Workers Plus Civilian Labor Force: Measure of the "Full" labor force, often used when calculating alternative measures of underutilization in order to include discouraged workers Underemployment: A measurement of the underemployment rate, calculated as the difference between alternative measures U-6 and U-5. This essentially looks at the widest possible definition of unemployment and the labor force, and separates out those that, while employed, feel that they are not in a position which suits their needs and abilities. 5

6 Index Unemployed: Persons aged 16 years and older who had no employment during the reference week, were available for work, except for temporary illness, and had made specific efforts to find employment sometime during the 4-week period ending the reference week. Persons who were waiting to be recalled to a job from which they had been laid off need not have been looking for work to be classified as unemployed. U-1: Persons unemployed 15 weeks or longer, as a percent of the civilian labor force U-2: Job losers and persons who completed temporary jobs, as a percent of the civilian labor force U-3: Total unemployed, as a percent of the civilian labor force (this is the definition used for the official unemployment rate) U-4: Total unemployed, plus discouraged workers, as a percent of the civilian labor force, plus discouraged workers U-5: Total unemployed, plus discouraged workers, plus all other marginally attached workers, as a percent of the civilian labor force, plus all marginally attached workers U-6: Total unemployed, plus all marginally attached workers, plus total employed part-time for economic reasons, as a percent of the civilian labor force plus all marginally attached workers U-1 Diff.: Difference between alternative measure U-1 and official unemployment measure U-3 U-2 Diff.: Difference between alternative measure U-2 and official unemployment measure U-3 U-4 Diff.: Difference between alternative measure U-4 and official unemployment measure U-3 U-5 Diff.: Difference between alternative measure U-5 and official unemployment measure U-3 U-6 Diff.: Difference between alternative measure U-6 and official unemployment measure U-3 6