Western states unemployment: The rest of the story

Most are aware that the official unemployment rate tells only part of the story. Lee McPheters, in the lead story of the Western Blue Chip Economic Forecast, writes that the U.S. Bureau of Labor Statistics also counts "discouraged workers" — those who have become so pessimistic about the economy that they have given up on the job search. But there are other groups of people who are also out of work — some because of circumstances and some who are involuntarily working part time. These groups, together with the discouraged seekers, constitute the labor "underutilization rate." Add labor underutilization to unemployment and the unemployment measure is in double digits for all but two Western states.

By Lee McPheters, Economy@W. P. Carey

With the July unemployment rate at 9.4 percent and 14.5 million unemployed, concerns about labor market conditions have weakened consumer confidence and affected spending patterns. Many consumers are now more aware of the official definition of unemployment ("available to take a job and have sought work in the past four weeks").

And they also know that the unemployment figures do not include those persons who have become so pessimistic about the economy that they have given up on the job search. The numbers of these "discouraged workers" are not usually highlighted in monthly media reports. According to the U.S. Bureau of Labor Statistics, there were 796,000 discouraged workers in July, up from 461,000 in the same month last year.

Part time for economic reasons

But there is yet another category of workers affected by the recession that is mentioned even less frequently than discouraged workers, and this group is significantly larger. As the late radio commentator Paul Harvey often said, we need to understand the "rest of the story" about labor markets in times of recession.

Across the nation, many private firms and public agencies have responded to slumping revenues and budgets with employee furloughs, shorter work weeks, and conversion of jobs from full time to part time. Those who are involuntarily working part time for economic reasons are measured each month by the household survey of the U.S. Bureau of Labor Statistics, but their numbers, as with discouraged workers, are not included among the unemployed.

In fact, they are counted right along with full-time workers as part of the total employment tally. The number of persons involuntarily cut back to part time for economic reasons has increased by more than 50 percent in the past year, reaching 8.6 million in July. This is ten times greater than the number of discouraged workers. The proportion of workers reduced to part time for economic reasons is shown in the figure.

Since 1980, the peak proportion of part-time jobs for economic reasons was 6.7 percent recorded in December during the recession of 1982. Involuntary part-time jobs increased again in the recessions of 1991 and 2001, but have surged this year to the current ratio of 6.3 percent of all jobs.

The rest of the story: Labor underutilization

The official unemployment rate is the percent of the labor force not working but looking for work. A broader measure of labor market conditions would include those persons who want to be in the labor force but are discouraged or unable to look for work (due to such circumstances as lack of transportation).

These persons are termed "marginally attached" workers by labor economists. Discouraged workers account for approximately one-third of the marginally attached. An even broader measure of labor market activity would include those in the labor force who are involuntarily working part time due to economic conditions.

The discouraged, other marginally attached and those working part time involuntarily are underutilized workers whose effect could be measured by an "underutilization rate." The U.S. Bureau of Labor Statistics recently has made these measures of labor underutilization available for states, reported on a four-quarter moving-average basis.

The table shows the latest results for the Western states, from the third quarter of 2008 through the second quarter of 2009. (Unemployment rates shown are computed directly from survey data, so the numbers vary somewhat from other BLS state unemployment rates.)

Adding discouraged and other marginally attached workers to the official unemployment count yields a labor underutilization rate for Western states that is an average of one percentage point greater than the official unemployment rate. Including workers with involuntary part-time status pushes the labor underutilization rate well into the double digits for most states, adding an average of five additional percentage points.

States with the largest differential between the two labor underutilization rates shown have converted the most jobs to part-time status due to economic conditions. The conclusion is that Oregon, California, Arizona and Nevada have seen the most increase in part-time jobs. The concept of labor underutilization helps to explain how a state such as Arizona can have a very weak economy, yet the official unemployment rate throughout the recession has been below the national rate.

The answer lies partly with discouraged workers. As they drop out of the economy, they are not included as unemployed or counted in the labor force, so growth in their ranks leaves the unemployment rate unchanged. But a larger factor is that, as the economy weakens, full-time jobs are converted involuntarily to part-time jobs.

There is no effect on the unemployment rate, but worker incomes decline. This leads to reduced spending. Sales of consumer goods and services decrease. Government revenues from income taxes and sales taxes decline. The economy deteriorates, but the unemployment rate is little affected, since part-time jobs and full-time jobs are counted the same in the official unemployment statistics.