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Unemployment

Analyzing unemployment data to show that "real" unemployment is worse than the headline numbers show. Created by Sal Khan.

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  • leafers seedling style avatar for user josh.draeger
    Are college students that work considered marginally employed (part time)? Are college students that don't work while in school considered unemployed? I know that more students are going to college instead of looking for a job, as well as older persons after loosing their jobs are going back to school. Are these people also considered unemployed during their time at school?
    (23 votes)
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  • blobby green style avatar for user bhaishab
    Hi, Im a little new to some of the phrases your using, and Im confused when you refer to "service based economies" I just want to know what kind of product such an economy is supposed to produce
    (8 votes)
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    • blobby green style avatar for user Kelsey Larson
      As nations grow wealthier, people tend to want a larger number of services done for them than in the past. For example, you may buy a haircut instead of doing one yourself, or hire someone to clean your house, do your taxes, repair your car, or complete some other largely intangible task for you. Along with things like banking or designing software for companies, things like this are called services. America's economy gains a large percentage of its wealth through such services, some of which (like engineering and consulting) we exchange with other nations in exchange for goods or other services. The US still produces goods, of course, but we gain more of our wealth through services.
      (22 votes)
  • blobby green style avatar for user Ray Givler
    Could anyone explain why we are experiencing inflation in consumer prices rather than the predicted deflation caused by the decreased labor utilization indicated in the video (though admittedly, the deflation in wages may be occurring)?
    (5 votes)
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    • blobby green style avatar for user jared.s.jacobson
      The current price rises are mainly due to higher commodity costs. The combined factors of more demand in the emerging markets and a fear of decreased supply is causing the price of commodities to rise and that makes most consumer goods to rise too. For example the labor cost of shipping a bar of chocolate is lower, but the cost of the gas to move it is higher. If we don't find better ways to utilize or substitute the current supply of commodities, this price rise won't be temporary.
      (6 votes)
  • aqualine seed style avatar for user Rods Shibs
    In my textbook they referred to different types of unemployment (frictional, structural, seasonal and cyclical). My teacher said that if global warming raises temperatures so high that snow can never exist again, a ski instructor would be structurally unemployed. I do not get this because according to me the ski instructor should be seasonally unemployed.
    (3 votes)
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    • leaf green style avatar for user Ryan
      Structural unemployment means the consumption within an economy changes and certain jobs are no longer needed. The change is permanent. If there was no snow you would never be able to ski again, so there would no longer be any need for ski instructors. Another example would be how the computer industry made a lot of people in the typewriter industry structurally unemployed. Or how the car industry made a lot of people in the horse and carriage industry structurally unemployed.

      Seasonally unemployed is just unemployment based on the seasons. Ski instructors in the summer, beech life guards in the winter and mall Santa's come January are all seasonally unemployed. Their jobs will exist again once the season comes back around.
      (8 votes)
  • old spice man green style avatar for user Jeff Krieger
    I found this video very informative. This does raise a question. Which U-# get reported in the financial news?
    (4 votes)
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  • leafers seed style avatar for user Barbara Mercer
    Unemployment then actually is not a true measure of the status of the blight of the non-working?
    (2 votes)
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    • old spice man green style avatar for user TerryMHogan
      Though I suppose you can use it in that sense, a more common turn of phrase would be "the plight of the non-working" rather than blight. Usually, you would talk about "the urban blight" of shuttered houses resulting from the financial crisis. And in response to your question, the answer is no. If you have not looked for work in the past month, you are not included in the U-3 numbers.
      (2 votes)
  • hopper jumping style avatar for user Smart-guy
    Can somebdy please explain to me all the way we can measure unemployment, in detail ( from U-1 to U-6)? It wil be help me alot to understand the unemployment rates in difference country.
    (3 votes)
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  • blobby green style avatar for user quaitedodson
    Are there labor statistics for other countries that show unemployment rates similar to the U6 figure?
    (2 votes)
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  • blobby green style avatar for user gregoryness
    How does the B of L determine if an individual is seeking a job? I have several friends that are networking, sending out resumes via e-mail, etc. How is someone included in the sample? And how big is this sample?
    (2 votes)
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    • blobby green style avatar for user nicholas.aakre
      Labor Force estimates are derived from the Current Population Survey (CPS). The CPS is conducted every month by the Census Bureau during the week of the 19th. Included in the survey is a set of questions that help categorize people as employed, unemployed, or not in the labor force for the various measures of labor under-utilization mentioned in the video.

      Sample selection for the CPS is done by dividing the country into Primary Sampling Units (PSUs). Within a given state, PSUs are grouped into strata based having similar demographics. One PSU from each stratum is selected. From those PSUs sampling clusters are selected. This results in approximately 60,000 households that are eligible for interview.

      In your friends' cases, networking, sending out resumes, etc. are considered "active job searches". So provided they did not work during the reference week (week of the 12th), were available for work, and conducted those active searches during the previous 4 weeks, they would be considered "unemployed" under the U-3 definition.
      (2 votes)
  • mr pants teal style avatar for user Ábel Mihály
    You note how the spread between U3 and U6 is increasing. But as you take their ratio it is always about 1.8! (U6/U3) Doesn't that contradict the point you are making here? Maybe the increase of U6 isn't something as notable?
    (2 votes)
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Video transcript

I've done a bunch of videos now on inflation and deflation and how they can be impacted by capacity utilization. And the traditional notion of capacity utilization, and this is what my brain does when someone mentions it, is I think of industrial capacity utilization. I imagine factories. And when people say low utilization, I imagine idle factories, and when high utilization, I imagine factories that are running at three shifts and things are moving feverishly. But in a service-based economy like we have here in the U.S. and like we have in a lot of Western societies, most of our real capacity for what we produce, or our GDP, is service based, because we're a service-based economy. And if you think about it, industrial capacity utilization, it matters, but it matters much more to manufacturing-based economy. In a service-based economy, the best measure of utilization really is unemployment. And I guess we could say the best measure of underutilization is unemployment. With that said, I think it's really important to have a deeper understanding of how unemployment is measured and how it's thought about from the Government, and the numbers you hear on CNN, what they really mean in terms of the real unemployment picture. And most of these charts, actually all of these charts that I have in this video, I got from Mike Shedlock, who runs the Global Economic Analysis blog. And I had a conversation with him on Friday and he pointed out some really interesting things. That's what I really want to cover, and I think it'll give us a good general view of unemployment and give us some clues as to what's going on right now. But I encourage you to read his blog. He goes by Mish, and he tells people that the best way to find his blog is to just do a search on Google for Mish. And he does a lot of this, where he looks at the economic data, but he goes several levels deeper than anyone really would go, especially on TV. But that's what you really have to do to really discern what matters. And I want to give him full credit because he really is who pointed out a lot of this to me, but I think it's very instructive to the capacity utilization and inflation-deflation argument that I've been making. So right here I have a screenshot from the Bureau Of Labor Statistics and you could go there, just do a search for them. And what most people don't realize is, just like on the money supply, you have different measures of money supply, you also have different measures of unemployment. And the number that you hear reported, at least since 1994, is U-3, and that's where we'll start. That's kind of the official rate of unemployment. I know you can't read this properly. My screen capture software doesn't do well with this font. But U-3 is total unemployed as a percent of the civilian labor force. So it's very important to realize what they consider unemployed and what they consider the labor force. They consider you unemployed if you don't have a job and you have looked for work in the past four weeks. And this is a really important point. It really is important to think about it relative to everything else I'll go over in this video. Because we've probably had times in our life where we considered ourselves unemployed or we considered someone else unemployed, but they had maybe gotten dejected and stopped looking a little bit or decided to take a break. It's important to realize, in the numbers that we hear from the Government, they don't count as part of the civilian labor force. Well, let's say, you stop looking for a job for five weeks, because you wanted to take a break and maybe redo your resume for awhile, so you're kind of passively looking for a job. The Government no longer considers you part of the labor force and you're not included in that number. They do have broader numbers that do include that. And I think that's important, because we're actually going to study the difference between the different numbers. U-4 is total unemployed. So it's the number up here, plus discouraged workers, as a percent of the civilian labor force, plus discouraged workers. So they're going to add the discouraged workers to the numerator. Let me do this in a different color. Before you had-- this is the standard one. You have unemployed over employed plus unemployed, as defined-- and when we say unemployed, it's someone who doesn't have a job, but you've looked for a job in the last four weeks. U-4 is now-- let me do it in a different color. It is unemployed plus discouraged over employed plus unemployed plus discouraged workers. And their definition of discouraged workers-- I just talked about people who haven't looked or actively looked for a job in more than five weeks or actually more than four weeks. You're considered discouraged if you give a reason for that, and you say, well, I just haven't looked for it, because I'm discouraged, because I don't think there are jobs for what I want to do anymore, so that's the reason why haven't looked for it. And that's when you get included into this bucket. And then U-5 is that same thing, but what they do is they add other marginally attached workers. And the difference between a discouraged worker and a marginally attached worker, a discouraged worker gives the economic reason. They say I haven't looked for a job in the past five weeks because I just think it's impossible. I want to work but it's just impossible find a job as an accountant or an engineer anymore. While a marginally attached worker also says I haven't looked for a job in the last five weeks, but they don't say it's because they think the economy is making it impossible. It could just be that they're-- I don't know-- depressed generally or they don't want to-- it could be a whole set of reasons. The important thing is that on the survey that the Bureau Of Labor Statistics conducts, that they don't literally give that argument that the only reason that they're not looking for it is economic reasons, and then they'll be put into the marginally attached workers and that's U-5. And then U-6 is really interesting because it includes all of these above, but it actually shifts some people. So in U-5 you would add marginally attached to the denominator there. In U-6 what you do is you have 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. So the important thing here is, plus total employed part-time for economic reasons. That's key, so the denominator doesn't change anymore, but this unemployed number is going to get bigger. Because there's some part of the employed population who are not working 40 hours a week, or they're not working as much as they want to work, or they're not maybe working in even the field they want to work. Maybe instead of working as an engineer, they're working 20 hours a week at the local bookstore or at Starbuck's, and these people are included in U-6. And the reason why I want to really highlight that, and Mish pointed this out to me, is that this is increasing much faster than this. And we'll think a little bit about why that's happening and what conclusions we can take. These are the numbers straight from the Bureau Of Labor Statistics. I know this screen right here is really hard to see, but if you look at March 2008, the U-3 number was 5.2% and the U-6 was 9.3%. So the difference between the two is about 4.1%. But if you go to the most recent month, the standard unemployment number is 8.5%, but the U-6, the one that includes the discouraged workers, the marginally attached workers and the people who aren't working full time for economic reasons, the difference is now 7.1%, so that spread. People who would like to work, but they've either stopped looking because they've gotten dejected, or they've just bitten the bullet and taken a job that they otherwise wouldn't want to take or taken fewer hours than they otherwise wouldn't want to take, that's growing. That really is. And the reason why we really want to focus on that is because it tells us that even though the unemployment rate, the official unemployment rate-- that is increasing very steeply and I'll show a graph right here, this is actually work Mish did, where he actually shows that the spread between U-6 and U-3 has been increasing, and it's been increasing at an accelerating rate since last February. That's actually shown right here in this graph. And he got this from his friend Chris Puplava at Financial Sense, so I want to give him credit for it. But you see here, U-6, this is the broad measure of unemployment that we talked about right here. That's increasing at an even faster rate than the standard unemployment measure. And this green line right here, this is actually the difference between the two. What's interesting about that is this is kind of measuring the percentage of the labor pool that's getting dejected, that's getting depressed. So they're either getting depressed or dejected and not looking for work, or they're just saying, you know what? I can't get a job 40 hours a week anymore as an accountant. I will now go work part-time at the local department store or do whatever it takes to put some food on the table for their families. In general, it shows the level of desperation. And if you look here, and this is really interesting. This is also from Chris Puplava. If you look relative to the path, the last major recession that a lot of people talk about is the early 80's, the double dip recession, and even though the headline unemployment rate-- let me make sure I get the right color-- the headline unemployment rate here is the blue line, that is still a good bit below. We peaked out there, and I don't know what the exact number is, but it looks like about in the mid 10%. Even though we're a lot lower than that now, we're at 8.2% right now, if you look at U-6, which is the broadest, that's spiked up. Unfortunately, the data for U-6 doesn't go back before 1994. They actually changed how a lot of things were measured. The official headline rate, instead of calling it U-3, it used to be called U-5, but it was, for the most part, the same measure, but that's changed a little bit. But U-6 did not exist before 1994 so, unfortunately, we can't measure U-6 back then. But a good, I guess, pseudo-indicator for U-6 that we do have more historical data on is the number of unemployed for more than 15 weeks. These are people who have been looking for work, but 15 weeks or more, they still haven't found a job even though they've been actively looking for work. And that, if you look at least while we have U-6 being measured, it has tracked that broad measure quite well. So if we can make the assumption that U-6 is always on that line or above it as it's graphed here, which it is so far, then U-6 in the early 80's was probably right around where that line is now. Maybe it was a little higher, maybe it was up here. But what this graph really does convey is that that broadest measure of unemployment is already as bad as it probably was in the early 80's. It's just that we don't have that data there. And if anything, those part-time workers, because they are employed, so in the official unemployment measure, they're actually making the number look a little bit better. Here you had fewer people. You were either employed or you were unemployed. If you're unemployed, you made the number look a little bit bigger. Here you have a lot more people who are kind of in-between, but they get counted in the employed number. So they're making the actual reported official unemployment rate a little bit lower than is actually the economic reality. I think that's a really important thing to realize that you have this accelerating rate of desperation out there in the economy and, if anything, it's telling us that things are getting worse, and it's telling us that things are probably as bad as they've been in some of the worst recessions in history and they're only getting worse. And going back to where we started this video, in terms of capacity utilization and what that might do to prices, this tells us that labor utilization is low and going down. What that tells us, is that the price of labor is going down. And you've probably read multiple news reports already about how this is the first time furloughs are big. People are actually taking wage cuts. So you're already seeing deflation in wages. And when so much of our economy, and even the basket of goods in the CPI-- and I'll do another video on that --is service based, if you're seeing deflation in wages, that's another data point that tells you, at least in the medium term, we're probably going to see further deflation in prices as a whole. See you in the next video.