Labor Underutilization in Utah



By: Jim Robson, Senior Economist


Utah’s official, monthly, seasonally-adjusted unemployment rate for October 2018 was 3.2 percent. Such a low rate has characterized the Utah labor market for several years. To be unemployed and counted in the labor force, a person must not have a job, be available to take a job and have actively sought a job in the past four weeks. But this “official” unemployment rate measure is not the only labor utilization measurement. The U.S. Bureau of Labor Statistics (BLS) actually has unemployment measures and labor underutilization measures beyond the official rate. It calculates these on a quarterly basis for the nation and all 50 states.


Unemployment and labor underutilization estimates are based on a national monthly survey called the Current Population Survey (CPS). Other variables are added to the state survey results, as state’s CPS sample is relatively small.


BLS’ most inclusive labor underutilization measure is known as U-6 (the last of six underutilization statistics). There are three components to U-6. In addition to the officially unemployed (U-3), BLS adds marginally attached workers — those who are available for work and have looked for work during the past year but did not look for work in the most recent four weeks (U-5). Finally, BLS adds in involuntary part-time workers [1] — those who are working part-time but want full-time jobs. This becomes U-6. U-6 cannot be labeled an unemployment rate, as it includes people who are not unemployed; but, these people are not working to the fullest extent they would like. From their perspective, they are underutilized. Because of this employed component, the U-series is labeled as an underutilization measure instead of an unemployment measure.


Because it is more broadly defined, U-6 is always higher than the official unemployment rate (U-3). Figure 1 shows a comparison of U-6 for Utah and the U.S. on an annual basis since 2003. Note for 2018’s second quarter, as mentioned, Utah’s official unemployment rate was around 3.1 percent. But the U-6 rate is 6.2 percent.


Figure 1 shows that Utah’s U-6 rate is generally lower than the national average. Figure 1 also reveals the impact of the Great Recession. Labor underutilization more than doubled between 2007 and 2010. Thereafter, Utah’s U-6 rate lowered at a faster pace than did the national average. The most recent rates are signaling a return to a fully employed labor force. The nation’s 7.8 percent is the lowest in the entire series, while Utah’s is low but has been lower.




Figures 2A and 2B depict U-6 by year broken down by the relative size of the three groups that comprise this measure: 1) the unemployed, 2) the marginally attached and 3) the involuntary part-time.


For Utah and the U.S., note that the changes in U-6 over the more than past seven years illustrate the continuing economic recovery and the resultant sustained job growth.






FULL EMPLOYMENT

Labor markets nationally, and in Utah, are considered “tight,” meaning employers have jobs available that they are unable to fill. BLS estimates there were 6.9 million job openings at the end of July 2018, while there were approximately 6.3 million people unemployed (U-3) at the same time; that’s more job openings than people unemployed. Economists know that no matter how good the economy is the unemployment rate will never fall to zero.


There will always be a mismatch between the skills and other characteristics employers’ desire and the unemployed’s skills and characteristics. There are also geographic mismatches when the jobs available and the people with the appropriate skills are not located in the same area. These are structural types of unemployment.


Healthy labor markets are also dynamic. Workers leave the labor market (e.g., move, retire, go to school, exit for other reasons), while others are new entrants or re-entrants seeking to be employed. Additional dynamism results as workers transfer to new positions, new employers or new occupations. These ongoing adjustments don’t occur instantaneously and result in what is called frictional unemployment.


There are always situations where employers and prospective workers do not agree on the terms of employment. The unemployed may not agree with the wages or other types of compensation offered.


There are seasonal industries that typically need workers for only part of the year, then lay-off workers who are then unemployed and may remain so for some time.


Given these structural and frictional unemployment types, economists refer to a “natural rate of unemployment” or so called “full employment.” Many believe the current Utah unemployment rate of 3.2 percent and the U.S. rate of 3.7 percent are at or even beyond full employment.


It is understood there is a greater level of labor underutilization than the official unemployment rate (U-3) captures. To get a pulse on this, BLS incorporates additional definitions and criteria to capture deeper labor underutilization. Its U-6 measure is BLS' most comprehensive effort at broad labor underutilization.


The difference or the “gap” between the official unemployment rate (U-3) and the U-6 measure can itself be viewed as an economic variable. In a healthy and robust labor market, the normal gap between the official unemployment rate and U-6 is generally 3 percentage points. This can be seen in Figure 2A as characterizing the 2018 time-period, in addition to 2006 through 2008. But during the Great Recession, the point of largest stress — namely 2010 — the U-3 to U-6 gap was as wide as 6.9 percentage points. This is saying that while the official unemployment rate was 8.1 percent, the greater underlying stress upon the economy was closer aligned to a 15 percent unemployment rate (though again not truly an unemployment rate as some of the U-6 inclusion are still employed part time). The greater converging of the gap between U-3 and U-6 speaks to an economy working toward a healthier environment.


In summary, the current Utah labor market is healthy. Both the official unemployment rate and the broader U-6 rate speak to that. The U-6 variable adds value as it helps put the official unemployment rate in a broader perspective and can speak to more comprehensive and underlying stress upon the economy in extreme economic times, such as the Great Recession.



[1] Reasons being their hours have been reduced below 35 hours per week, or they could not find a job with 35 hours or more per week.