How Is The Underemployment Rate Calculated

Calculate the underemployment rate using official economic metrics

The underemployment rate (also called the U-6 rate) is a critical economic indicator that provides a more comprehensive view of labor market health than the standard unemployment rate. This metric captures not just unemployed workers, but also those who are working part-time because they can’t find full-time work and those who want to work but have given up looking.

Understanding the Components of Underemployment

The underemployment rate consists of three main components that together paint a fuller picture of labor market slack:

1. Officially Unemployed (U-3): People who are without work, have actively looked for work in the past four weeks, and are currently available for work.
2. Part-time for Economic Reasons: Workers who would prefer full-time employment but are working part-time because their hours have been reduced or they can’t find full-time jobs.
3. Marginally Attached Workers: Individuals who want to work, are available for work, and have looked for a job sometime in the past 12 months but haven’t looked in the past four weeks.

The Mathematical Formula

The underemployment rate is calculated using this formula:

Underemployment Rate = [(Unemployed + Part-time for Economic Reasons + Marginally Attached) / (Total Labor Force)] × 100

Where:

• Total Labor Force = Employed + Unemployed (official U-3 measure)

How Underemployment Differs from Unemployment

While the standard unemployment rate (U-3) only counts people who are actively looking for work, the underemployment rate casts a wider net:

Metric	Includes	Typical Range	Economic Significance
Unemployment Rate (U-3)	Only actively job searching	3-10%	Basic labor market health
Underemployment Rate (U-6)	Unemployed + part-time + marginally attached	7-17%	Complete labor market slack

The underemployment rate is typically about 7-10 percentage points higher than the official unemployment rate during normal economic times, but this gap can widen significantly during recessions.

Historical Trends in Underemployment

Underemployment rates have shown distinct patterns through different economic cycles:

Period	Avg. Unemployment Rate	Avg. Underemployment Rate	Gap Between Measures
2000-2001 Recession	4.8%	8.3%	3.5%
2007-2009 Great Recession	9.3%	16.1%	6.8%
2015-2019 Expansion	4.7%	9.2%	4.5%
2020 COVID-19 Pandemic	8.1%	14.8%	6.7%

These historical patterns show that underemployment typically rises more sharply during downturns and recovers more slowly than the official unemployment rate.

Why Underemployment Matters for Economic Policy

Policymakers pay close attention to underemployment because:

1. More Comprehensive Measure: It captures labor market slack that the standard unemployment rate misses, including discouraged workers and those stuck in part-time jobs.
2. Wage Pressure Indicator: High underemployment suggests there’s still slack in the labor market, which can keep wage growth subdued even as the official unemployment rate falls.
3. Inflation Signal: The Federal Reserve watches underemployment when setting monetary policy, as it can indicate how much room the economy has to grow before inflation becomes a concern.
4. Social Impact: Underemployment affects income inequality, mental health, and overall economic well-being more than standard unemployment measures.

Federal Reserve and Underemployment

The Federal Reserve explicitly considers underemployment in its dual mandate of maximum employment and price stability. Research from the Federal Reserve Board shows that underemployment has significant predictive power for wage growth and inflation.

Limitations of the Underemployment Rate

While more comprehensive than the standard unemployment rate, the underemployment rate has some limitations:

• Data Collection Challenges: Some marginally attached workers may not be accurately captured in surveys.
• Voluntary Part-time Work: The measure doesn’t distinguish between those who voluntarily choose part-time work and those who are underemployed.
• Quality of Employment: It doesn’t account for overqualified workers or those in jobs below their skill level.
• Regional Variations: National averages can mask significant differences between states and metropolitan areas.

How to Interpret Underemployment Data

When analyzing underemployment rates, economists look at several key factors:

1. Trend Direction: Is the rate improving (falling) or worsening (rising) over time?
2. Gap with Unemployment: A widening gap suggests increasing labor market slack.
3. Demographic Breakdowns: Underemployment often affects younger workers, minorities, and those with lower education levels more severely.
4. Industry Patterns: Some sectors (like retail and hospitality) typically have higher underemployment rates.

Seasonal Adjustments

Like other labor market statistics, underemployment rates are typically reported on a seasonally adjusted basis to account for predictable patterns like:

• Holiday retail hiring in Q4
• Summer youth employment
• Agricultural work cycles
• School year patterns affecting student workers

International Comparisons

Most developed countries track similar measures of underemployment, though methodologies vary:

• Eurostat (EU): Reports “part-time employment for economic reasons” separately from unemployment
• Australia: Publishes a comprehensive underemployment rate similar to the U.S. U-6
• Canada: Tracks “involuntary part-time” workers as part of its R8 unemployment measure
• UK: Uses a “underemployment rate” that focuses primarily on part-time workers wanting more hours

The OECD provides comparative data on underemployment across member countries, showing that the U.S. methodology (U-6) is among the most comprehensive.

Practical Applications of Underemployment Data

Underemployment statistics have practical applications for:

Businesses

• Workforce planning and hiring strategies
• Compensation benchmarking
• Identifying labor market opportunities

Workers

• Assessing job market conditions
• Negotiating salaries and benefits
• Deciding whether to pursue additional education

Investors

• Evaluating economic health and growth potential
• Assessing interest rate movement probabilities
• Identifying sector-specific opportunities

Recent Developments in Underemployment Measurement

The Bureau of Labor Statistics (BLS) has made several improvements to underemployment measurement in recent years:

1. Enhanced Survey Questions: More detailed questions about reasons for part-time work and job search activities
2. Real-time Data: Experimental programs to provide more timely underemployment estimates
3. Regional Breakdowns: More granular state and metropolitan area data
4. Demographic Analysis: Better tracking of underemployment by age, race, and education level

For the most current methodology, see the BLS Current Population Survey documentation.

How to Calculate Underemployment for Specific Groups

The same basic formula applies when calculating underemployment for specific demographic groups, but the components may vary:

Youth Underemployment

For workers aged 16-24, the calculation would focus on:

• Students working part-time who want full-time work
• Recent graduates in jobs not requiring their degree
• Young people who have given up looking for work

Educational Attainment

Underemployment rates typically show:

• Highest rates for those with less than a high school diploma
• Lower rates for college graduates, though “malemployment” (working in jobs not requiring their degree) is a growing concern

Common Misconceptions About Underemployment

Several myths persist about underemployment that can lead to misinterpretation:

1. “Underemployment is just unemployment plus part-time workers”: It actually includes three distinct groups (unemployed, part-time for economic reasons, and marginally attached).
2. “A falling underemployment rate always means the economy is improving”: It could also reflect discouraged workers leaving the labor force entirely.
3. “Underemployment only affects low-skilled workers”: Even highly educated workers can be underemployed, especially during economic downturns.
4. “The government manipulates underemployment numbers”: The BLS uses consistent, transparent methodology that’s been stable for decades.

Resources for Tracking Underemployment

For those interested in monitoring underemployment trends, these resources provide authoritative data:

• BLS Employment Situation Release (Table A-15): Monthly U-6 data
• FRED Economic Data (U6RATE): Historical underemployment rate series
• OECD Underemployment Data: International comparisons