How the Unemployment Rate Rose While the Economy Added Jobs

The Department of Labor’s (DOL) seemingly contradictory report Friday that the nation’s unemployment rate had risen marginally to 5.9 percent, up 1/10^th of a point from the previous month, despite the economy adding 850,000 new jobs over the same period, is good news. It means that not only are businesses hiring more but that, crucially, more people are looking for work.

They are doing it because they can. DOL found that 6.2 million people reported in June that they were unable to work because their employer was closed or lost business due to the pandemic, down from 7.9 million reporting the same problem in May.

The report’s mixed news comes from the peculiar way the department defines being unemployed. It uses six different definitions, dubbed U-1 through U-6, that start narrowly in terms of whom they define as unemployed and gradually get broader. The “official rate” is U-3, which counts people who are unemployed and actively looking for work. That’s where Friday’s 5.9 percent figure comes from.

Why is U-3 the official rate? Nobody seems to know. Seriously. I have asked Labor Department officials in multiple different administrations why this is the case and the response has always been a variation on “That’s just the way we have always done it.” 

The problem with U-3 is that it excludes a lot of people who common sense would tell you are either unemployed or not fully employed. U-4, for example, includes everyone in U-3 as well as discouraged folks who would be looking for jobs if they thought any were available.

U-5 is similar to U-4 but with an even broader definition of people who would be looking for jobs if they thought any were available.

The U-6 number gives the fullest picture of the nation’s jobless: It counts everyone represented in U-5 as well as people working part time who rather be working full-time. 

Notably, U-6 is the only one of the six that dropped from May to June, falling to 9.8 percent, down from 10.4 percent. The “official” rate’s increase represents the fact that more people are out looking for jobs while U-6’s decline reflects that the economy is growing and that fewer people are staying home.

June’s gain of 850,000 jobs can largely be attributed to the continued rollback of state and federal restrictions related to the COVID-19 epidemic. The biggest gains were seen in the leisure and hospitality industry (343,000 jobs) and public and private education (269,000 jobs). Both sectors were the ones hardest hit by the restrictions because they involve gatherings of people, so their continued recovery is a welcome sign.