Question

In May 2017, an article in the New York Times had the headline: "We're Getting Awfully Close to Full Employment." The article contained the following observation: "The socalled \(U-6\) rate \(\ldots\) fell to 8.6 percent in April from 8.9 percent [in March]." a. What is the U-6 unemployment rate? Why do economists and policymakers track changes in this measure of the unemployment rate? b. What is full employment? If the U.S. economy was close to full employment in May 2017 , why was the \(\mathrm{U}-6\) measure of the unemployment rate still as high as \(8.6 ?\)

Short answer

The U-6 unemployment rate is comprehensive as it tracks joblessness, underemployment and the marginally attached. It provides a broader view on employment, thus followed by economists. Full employment is when all available labor resources are efficiently used, implying lowest practical level of unemployment. Despite being near such state, U-6 rate can be high as full employment doesn't imply zero unemployment or underemployment.

Step-by-step solution

Define U-6 Unemployment Rate

The U-6 unemployment rate is a measure of unemployment that includes those who are jobless, those who are marginally attached to the labor force, and those working part-time but prefer full-time jobs. Economists and policymakers track changes in this measure because it offers a broader and more comprehensive view of employment circumstances in a country, as it considers not just those entirely without work, but also those who are underemployed.

Define Full Employment

Full employment is an economic situation in which all available labor resources are being used in the most efficient way possible. This does not mean that every single individual in the economy is employed, but rather, it signifies that unemployment has reached its lowest practical level and cannot further decrease without leading to inflation.

Explain the High U-6 Rate

Despite the U.S. economy being close to full employment in May 2017, the U-6 rate was still high because full employment does not imply no unemployment or underemployment. The U-6 rate considers both unemployment and underemployment. Hence, there could still be a considerable number of individuals who are underutilized, i.e., those working part-time who would prefer full-time jobs or those marginally attached to the labor force.

Key concepts

Full Employment

Full employment is an economic condition where virtually all willing and capable individuals are engaged in productive work. It's important to understand that full employment doesn't mean zero unemployment. Rather, it signifies that unemployment is reduced to the lowest level that won't trigger inflation.
To further clarify, even with full employment:

• There will be some "frictional unemployment" - a natural part of job turnover in a healthy economy, where people switch jobs, or enter or leave the labor force.
• Involuntary unemployment is minimized, but not eradicated.

Understanding this concept is key when grasping why unemployment rates, like the U-6, remain elevated even when an economy is near full employment. It shows that policies aim not just at any job for people, but the most suitable one, skill-wise and economically. Recognizing this nuance assists in comprehending why the U-6, which includes underemployment, might still report a higher percentage, indicating economic inefficiencies despite robust employment figures.

Underemployment

Underemployment is a condition where individuals are employed in roles that are below their skills or work fewer hours than they prefer. It's distinct from unemployment because, technically, those underemployed are working, but often not to their full potential.
There are a few key types of underemployment to be aware of:

• **Visible underemployment:** where workers are part-time but wish to work full-time.
• **Invisible underemployment:** where workers are overqualified for the jobs they hold compared to their education or skills.

This condition often reflects in higher U-6 unemployment rates because:

• It accounts for those who seek more hours than their current jobs provide.
• It considers individuals who are in roles that do not fully utilize their abilities.

Thus, a well-rounded employment metric includes underemployment, revealing the depth of labor market issues beyond just headline joblessness figures. Addressing underemployment helps in achieving greater economic efficiency and satisfaction among the workforce.

Employment Rate Tracking

Employment rate tracking involves monitoring various unemployment metrics to get a precise picture of the labor market. Among these, the U-6 unemployment rate is vital as it offers a broader view by including discouraged workers and those underemployed.
This measure can be crucial for several reasons:

• Tracking the U-6 allows policymakers to discern the quality of employment rather than quantity alone.
• It provides insights into economic trends and potential vulnerabilities within the workforce.
• By understanding underemployment levels, interventions can be more targeted and effective.

Employment rate tracking is a tool for better economic planning. Policymakers can devise strategies to improve job quality, thereby reducing underemployment and aligning the workforce more closely with the demands of the economy. In essence, comprehensive tracking like the U-6 allows for a proactive approach in cultivating stable and sustainable employment landscapes.