The unemployment rate is one of the two components of the Fed's dual mandate and one of the most-watched economic statistics. It is also one of the most misunderstood. Understanding U-3, U-6, the participation rate, and the employment-population ratio together is the working macro literacy.
- 01Distinguish U-3 from U-6.
- 02Explain the labor-force participation rate and why it moves the headline number.
- 03Read a Bureau of Labor Statistics employment report.
The definitions
U-3 is the headline unemployment rate: unemployed people looking for work as a share of the labor force. U-6 is broader: includes marginally attached and part-time-for-economic-reasons. Both are worth watching; U-6 catches slack that U-3 misses.
Participation
The labor force is everyone working plus everyone looking. People who stop looking leave the labor force. The unemployment rate can fall because people find jobs — good — or because people give up — bad. The participation rate distinguishes them.
The employment-population ratio
Employed people as a share of the working-age population. It sidesteps the participation ambiguity and answers the direct question: what share of the working-age population is working? It is the most honest single measure of labor-market strength.
- U-3 is the headline. U-6 is the truer measure of slack.
- Participation distinguishes finding jobs from giving up.
- Employment-population ratio sidesteps both problems.