Stop using the U-3 unemployment measure and focus on E-P ratio

Wrong. Instead, as I and others have argued, the unemployment rate, considered in isolation, gives us an incomplete and misleading impression of the labor market’s health because it counts only those people who are out of work and say they are actively searching for a job.

What it leaves out are the millions of Americans who are categorized as “not in the labor force” — that is, unemployed, but report not looking for work. As it turns out, approximately 2 million of these so-called non-participants find jobs in a given month, or about the same number of new hires as there are among the officially unemployed, and a clear indication that the unemployment rate does not capture the full universe of labor market hardship.

In Easter terms, its equivalent to thinking today is all about a magical bunny delivering candy and pastel colored eggs to excited children, while leaving out the deeper, spiritual story of sacrifice and suffering, of faith and forgiveness, of redemption, renewal and rebirth.

It doesn’t have to be this way. There is another indicator, the employment-population (E-P) ratio, that provides a more complete picture of the labor market — and it’s right there in the jobs report, albeit below the fold. Instead of focusing on a subset of who isn’t working, the E-P ratio tells us who is: the share of the adult population that is employed. In other words, it adjusts the unemployment rate for labor force participation. If you want to calculate it, all you have to do is subtract the unemployment rate from 100 and multiply it by the participation rate (assuming all the indicators are measured in percents).

Note (Ed): I generally use U-6 as the better measure, and use the civilian workforce participation rate for what Mike Cassidy suggests. However, E-P is just as valid, and slightly less volatile. Both CWPR and E-P translate much better when dealing with sharp changes in workforce definitions, too.