Every month, the Bureau of Labor Statistics (BLS), reports the monthly unemployment rates and payroll changes derived from two reports1 that can influence global markets and decision making in companies. How much does this data reveal about the state of the U.S. labor market?
Back to the Basics
The monthly labor data is commonly referred to as the “jobs report” but officially called the Employment Situation Summary and is derived from two reports:
- The Establishment Survey reports the monthly changes in the employment data with responses from companies designed to represent all states, sizes, and industries. About 45% of the survey sample includes organizations with less than 20 employees.2
- The monthly Current Population Survey, better known as the Household Survey, calculates the unemployment rate. The survey “includes self-employed workers whose businesses are unincorporated, unpaid family workers, agricultural workers, and private household workers, who are excluded by the establishment survey. The household survey also provides estimates of employment for demographic groups.”3
Definitions of Unemployment
BLS parses the Household survey data into six unemployment indices. Yes, you read that correctly, there are six definitions of the U.S. unemployment rate (Figure 1). The monthly unemployment rate quoted is sometimes referred to as the “headline” number and is the official unemployment rate. Or technically named U-3, it refers to individuals meeting these criteria: a) not currently working, b) searched for work in the past four weeks, and c) are available to work. U-3 best aligns with the widely accepted international definition of unemployment.4
The other five definitions are often referred to as alternative measures of unemployment and officially called measures of labor underutilization.5 The definitions range from U-1 to U-6, marking the narrowest to the widest definition of unemployment, which may give greater insight of the labor market’s structure and nuances.
Figure 1: The table below lists the 6 definitions:
| U–1 | Persons unemployed at least 15 weeks. |
| U–2 | People who involuntarily left their job or completed a temporary job. |
| U–3 | Seeking a job over the last four weeks. |
| U–4 | U-3 plus discouraged workers (gave up looking and looked for work sometime in the last 15 months or held a job in the last 15 months). |
| U–5 | U-4 plus marginally attached (gave up and use any reason for not seeking a job in the last four weeks). |
| U–6 | Includes U-5, plus people taking part-time jobs (working less than 35 hours/week and want to work) because they can’t find a full-time job, and people who have given up searching and walked away from the job market. |
Source: https://www.bls.gov/news.release/empsit.t15.htm Dec 6, 2024. https://www.bls.gov/opub/hom/glossary.htm
Figure 2 lists the unemployment rate for each unemployment category for the January 2025 jobs report. U-3 at 4.0% is the official U.S. unemployment rate, and U-6 at 7.5% includes those who have given up looking for a job.
Figure 2: Unemployment rates, January 2025
| U–1 | 1.5% |
| U–2 | 1.9% |
| U–3 | 4.0% |
| U–4 | 4.3% |
| U–5 | 4.9% |
| U–6 | 7.5% |
Source: https://www.bls.gov/news.release/empsit.t15.htm February 7, 2025. Seasonally Adjusted.
What Does the Unemployment Rate and MTV Have in Common?
People taking part-time work due to not being able to find full-time employment are often referred to as “underemployed”. This term became a popular phrase after the financial crisis,6 to the point that in 2012 MTV introduced a television series called Underemployed, which was about a group of newly minted college graduates dealing with the hurdles of establishing their careers.
The U-3 data offers a general view of the labor market. However, analyzing U-6 may offer greater insight into the structure of the labor market, as it aggregates multiple labor market components. U-6 tends to be a lesser-known measurement introduced in 1994. The U-3 data starts in 1948.
Behavior of the Unemployment Rates
Because U-6 is a wider definition of unemployment, it therefore usually reports a higher unemployment rate than U-3. From Jan 1994 to January 2025, the premium of U-6 to U-3 ranged from 1.55 to 2.06, with an average ratio of 1.83, implying the U-6 rate tends to be about 80% greater than the U-3 unemployment rate. From September 2014 to March 2020, the ratio was around 2.0.
The difference between the two unemployment rates is evidenced in the spread between the two indices in Figures 3, 4, & 5. For example, during the financial crisis, U-3 peaked at 10% in October 2009. However, that same month, U-6 reported 17.1% and peaked at 17.2% in December 2009. During COVID-19 in April 2020, U-3 peaked at 14.8% while U-6 reached a maximum of 22.9%.
The behavior of U-3 and U-6 is noted in Figure 3. When unemployment moves higher, U-6 tends to accelerate faster than U-3, causing the spread of the two metrics to widen. This suggests more activity is occurring in various labor market segments other than that U-3 describes.
During moments of a tight labor market such as April 2023, U-6 and U-3 declined to 6.6% and 3.4%, respectively, equating to a spread of 3.2. In April 2000, U-6 and U-3 bottomed at 6.9% and 3.8%, respectively, with a spread of 3.1. Since the introduction of U-6 in 1994, only once did the spread narrow to 2.9, in October 2000.
After the financial crisis, it took several years for both the spread and unemployment rates to return to pre-crisis levels. This would imply the labor market may have been hit harder than assumed.
Figure 3: U-6, U-3, and the difference between the two measurements.
The Figure 3 data demonstrates, when unemployment is low, the spread tends to be smaller. As unemployment increases, so does the spread, meaning there are cyclical changes in the labor market as more people take part-time jobs or stop looking for a new job. The spread can also widen when U-3 declines and U-6 remains stable, such as what occurred in the January 2025 report. If more people drop out of the labor market, the labor market declines, and could cause the spread between the two rates to increase.
Given the spread distribution data, it can be difficult for the spread to remain low. For example, in June 2024, U-6 was 7.4% and U-3 was 4.1%, with a spread at 3.3. By August, U-6 was 7.8% and U-3 was 4.2% equating to a 3.6 spread. These spreads are historically low.
The Figure 4 histogram may help explain the distribution of the U-6 to U-3 spread differential from January 1994 to December 2024. The black columns represent the spread at 3.3 or less, accounting for about 15% of the spread distribution. The blue columns represent the remaining 85% of the distribution. The median is 4 with an average of 4.5, suggesting the spread tends to be wider than current levels. The spread differential between U-6 to U-3 has the highest frequencies between 3.7 and 4. The data suggests it could be difficult to maintain an historically narrow spread for an extended period.
Figure 4: Spread Distribution of the U-6 and U-3 rates
The two maximum outliers of 8.1 and 7.9 occurred in April and May 2020 during COVID-19. Removing the two outliers does not change the average and median.
Figure 5: Ratio of U-6 to U-3
Takeaway
Examining alternative measures of unemployment allows one to focus on various segments of the labor market. As well, analyzing U-6 and comparing it to the official unemployment rate (U-3), along with analysis of the spread between the two unemployment measurements may offer a deeper insight to the health of the U.S. labor market.
References
- https://www.bls.gov/news.release/pdf/empsit.pdf Jan 10, 2025.
- https://www.bls.gov/news.release/pdf/empsit.pdf
- www.bls.gov/web/empsit/ces_cps_trends.htm.
- https://www.bls.gov/opub/mlr/2000/06/art1full.pdf
- https://crsreports.congress.gov/product/pdf/IF/IF10443/5
- https://trends.google.com/trends/explore?date=all&geo=US&q=underemployed&hl=en
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All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.
