If you're seeing this message, it means we're having trouble loading external resources on our website.

If you're behind a web filter, please make sure that the domains *.kastatic.org and *.kasandbox.org are unblocked.

Main content
Current time:0:00Total duration:12:53

Video transcript

I've done a bunch of videos now on inflation and deflation how they can be impacted by capacity utilization and the traditional notion of capacity utilization and this is kind of 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 you know things are moving feverishly but in a service based economy like like we have here in the US 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 industrial capacity utilization it matters but it matters much more in a 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 under utilization is unemployment and with that with that said I think it's really important to kind of have a deeper understanding of how unemployment is measured and how its thought about from the government and what you know the numbers you here 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 shed Lok runs the Global Economic Analysis blog and I had a conversation with him in Friday and he pointed out some some really interesting things and that's what I really wanted to cover and I think it'll give us a good general view of an 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 just do a search on Google for mish and he does a lot of this where he kind of 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 with that said and what say I want to give him full credit because he really is the 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 screen shot from the Bureau of Labor Statistics and you could go there just you know dual search for them and what most people really don't realize is just like on the money supply you have different measure money supply you also have different measures of unemployment and the number that you hear reported at least since 1994 is u3 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 you three 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 voice labor force they consider you unemployed if you don't have a job and you have looked for work looked for work in the past four weeks 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 all know and we 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 and it's important realize the numbers that we hear from the government they don't count as part of the civilian labor force if you you know if you look for job for four weeks well let's say you stopped looking for a job for five weeks if you wanted to take a break and maybe you know redo your resume for a while 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 u4 is total unemployed so it's the number up here plus discouraged workers as a percent of the civilian labor force plus discouraged workers all right so they're going to add the discouraged workers to the numerator right they're going to so before you had unemployed over 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 where they say unemployed is someone who doesn't have a job but you've looked for a job in the last four weeks you four is now let me do it in a different color it is have to do it is unemployed plus discouraged over employed plus unemployed plus discouraged workers and their definition of discouraged workers we had 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 I haven't looked for it and that's when you you get included to this bucket and then u5 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 workers 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 it's just impossible to find a job as an accountant or an engineer anymore while a marginally attached workers 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 they you know they're I don't know depressed generally they don't want to I mean it could be a whole set of reasons it's the important thing is it's down the survey that that the Bureau of the Bureau of Labor Statistics conducts that they don't literally give that that argument that the only reason that they're not looking forward is economic reasons and then they'll they'll be put into the marginally attached workers and that's you five and then you six and you six is really interesting because it includes all of these above but actually shifts some people right so this is you five you would add marginally attached to the numerator and denominator there use six 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 pop part of the employed population who they're 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 there maybe instead of working as an engineer they're working 20 hours a week at the local bookstore at Starbucks and these people are included in u6 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 and what he did and these are these are the numbers straight from the Bureau of Labor Statistics and just so I know this screen right here is really hard to see but if you look at March 2008 the u3 number was 5.2 percent and the u6 was 9.3 so the difference between the two was about what four point one but if you go to the most recent month the standard unemployment number is eight point five but the u6 the one that includes the the discouraged workers the marginally attached workers and the people who aren't working full-time for economic reasons the difference is now seven point one percent so that's spread or I guess you could count people who would like to work but they they've either stopped looking because they've gotten dejected or they've just you know bitten the bullet and taking a job that they otherwise wouldn't want to take or take taking few hours and they otherwise wouldn't want to take that's growing that's growing and 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 and that is increasing very steeply and I'll show a graph right here and this is actually work that Mich did where he actually shows that the spread between between u6 and u3 has been increasing and it's been increasing at an accelerating rate since last February and that's actually shown right here in this graph where this is and he got this from his friend Chris Pope of let financial cents so I want to give him credit for it but you see here u6 this is a 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 and what what's interesting about that is this is kind of measuring the percentage of the labor that's getting dejected that's getting depressed and/or that is so they're either getting depressed or dejected and not looking for work or they're just they're just saying you know what I can't get a job 40 hours a week anymore as accountant I will now go work part-time at the local department store or you know do whatever it takes to put some food on the table for for their families so in general shows a level of desperation and if you look here and this is really interesting this is also from Chris boof oblah is if you look relative to the past and a lot of people the last major recession that a lot of people talk about is the early 80s the double-dip recession and even though our kind of the headline unemployment rate and that let me make sure I get the right color the headline unemployment right here is the blue line that is still a good bit below we peaked out there and kind of the I know the exact number is but looks about a little in the mid 10% even though we're a lot lower than that now we're 8.2 percent right now if you look at you 6 which is the broadest that's biked up that spiked up and unfortunately data for the u6 doesn't go back before 1994 they actually changed how a lot of things were measured what we the official headline rate instead of calling it u3 it used to be called u5 but it was for the most part the same measure but it's that's changed a little bit but you 6 did not exist before 1994 so unfortunately we can't measure use u6 back then but a good I guess pseudo indicator for u6 that we do have more historical data on are the number employed 15 the number of unemployed for more than 15 weeks so these are people who you know they've 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 u6 being measured it has tracked that broad measure quite well so if we can kind of make the assumption that u6 is always is always on that line or above it as its graphed here which it is so far then use 6 in the early 80s u6 in the early 80s was probably right around where that line is now maybe it was a little higher maybe it was up here but the the what this graph really does can vait is is that that broadest measure of unemployment is already as bad as it probably was in the early eighties it's just we don't have that data there and if anything those part-time workers because they are employed and so in the official unemployment measure they're actually making the number look a little bit better so they actually you know here you had fewer people you were there 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 who they're kind of in between but they get they get counted in the employed number so they're making are that they're making the actual reported you know 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 kind of 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 you know going back to what we where we started this video in terms of capacity utilization and what that might do to prices this tells us that labor utilization labor utilization is low and going down and what that tells us is the price of labor is going down and you've probably read multiple news reports already about this is the first time furloughs are being big our big people actually taking wage they're actually taking wage cuts so we're you're already seeing of deflation and wages and when so much of our economy and even the baskets of basket of goods in the CPI and I'll do another video on that is service based if you're seeing deflation and wages that's another data point that tells you at least in the medium term we're probably going to see further deflation it in in prices as a whole see in the next video