What’s the REAL unemployment rate? by Nicholas Wells and Mark Fahey

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The Labor Department said Friday that the unemployment rate was unchanged at 5 percent in December. But what does that number really mean?

Economists look past the “main” unemployment number (also known as the “U-3 rate”) to other indicators in the report that give a more nuanced view of the employment situation. On jobs days, the Bureau of Labor Statistics puts out a slew of figures, each of which measures a different part of the economy.

One of those data points is the U-6 rate. Many experts prefer the U-6 rate to the U-3 rate because it captures those employees who work part time but would like to be working full time.

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The BLS defines U-6 as “total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force,” plus all marginally attached workers.

In other words, the unemployed, the underemployed and the discouraged — a rate that remains stubbornly above precession levels.

The U-6 rate also stayed level in December at 9.9 percent. Overall, the U-6 has been more volatile than the unemployment rate since the recession. It’s down 130 basis points over the past year, versus a 60-basis-point drop in the U-3.

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This month’s release is of particular interest as it’s the first jobs report since the Federal Reserve raised its federal funds interest rate target in December.

The Fed had waited months to see evidence of a sustained recovery, including in the form of lower unemployment and increasing labor market participation, before raising rates. The interest rate hike is not expected to affect the job market significantly, and the Fed isn’t expected to consider raising rates again until March.

The nation added 292,000 jobs in December, soundly beating estimates of 200,000.

The report is a welcome indicator of economic health in the face of the recent market upheavals amid concern about an expected slowdown in China and weak commodity prices.

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Another measure of the employment situation economists often use is the ratio of vacancies post to the number of unemployed persons. This v/u ratio measures labor market tightness: A rising indicator means mores businesses are looking to fill positions relative to the number of job seekers.

In a robust economy, we would expect to see that number rising and indeed, it reached prerecession levels this year.

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 Originally posted on CNBC
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