Related link: http://www.richmondfed.org/publications/research/region_focus/2009/spring/research_spotlight_weblinks.cfmEconomic policy ; Capital market

Stephen Slivinski

English

Research Papers in Economics

10 Region Focus • Spring 2009 Spring 2009 • Region Focus 11
T
he monthly unemployment rate most people are
familiar with tracks people who are out of work and
searching for new jobs. However, it’s only one of
six measures of unemployment published by the Bureau
of Labor Statistics (BLS). The BLS also produces a broader
measurement, sometimes referred to as the “underem-
ployment rate” or the “U-6 rate” after the dataset on which
it is based. The U-6 rate, according to the BLS, includes the 
officially unemployed plus all marginally attached workers
and people employed part-time for economic reasons as a
share of the civilian labor force plus all marginally attached
workers. Through June 2009, the underemployment rate
reached 16.5 percent, the highest since the BLS redesigned
its unemployment figures and created the 
U-6 in 1994. In 1993 the BLS stopped the
U-7 data set, which was previously its
broadest measure of unemployment.  
Workers classified as “marginally
attached” and “discouraged workers” are
included in the underemployment calcula-
tion. They are typically just a small portion
of the people outside the labor force as
measured by the BLS, which defines the
labor force as the sum of all employed and
unemployed people. Employed people per-
formed any work for pay or profit during
the survey week, did at least 15 hours of
unpaid work in a family-owned business, or
were absent from work because of bad weather, illness, vaca-
tion, industrial disputes, or various personal reasons. People
who do not have a job but have actively searched for one in
the last four weeks and are immediately available for work
are counted as unemployed. 
Typically most people not in the labor force do not seek
employment because they’re retired, attending to family
responsibilities, going to school, or are physically unable
work. The marginally attached are neither employed nor
looking for work but have sought work in the past year and
are available immediately. Family responsibilities or trans-
portation concerns can keep marginally attached workers
out of the work force. Discouraged workers are not
employed and not seeking work because they believe noth-
ing is available for them. 
All six unemployment measures the Bureau of Labor
Statistics publishes follow a similar pattern: Both the under-
employment and unemployment rates move in the same
direction. What is perhaps most relevant to economic
researchers is how these measures move relative to each
other, says Jason Faberman, an economist at the Federal
Reserve Bank of Philadelphia. For general audiences, the
fact that the official unemployment rate follows the same
trend as alternative unemployment figures makes things
easy, says Faberman. “For a lay person, what this tells you is
that looking at the unemployment number is going to give
you the same story in relative terms as looking at the under-
employment number.” Because they move in the same
direction, both numbers will tell the same general story over
time, Faberman says. 
Unemployment measures and other labor market indica-
tors are derived from data generated by the Current
Population Survey (CPS), sent to 60,000 households a
month. Before the 1994 changes to the survey, the BLS sent
the old and new versions of the question-
naire simultaneously between July 1992
and December 1993. The new question-
naire produced an unemployment rate
half a percentage point higher for 1993. 
Survey participants faced more exten-
sive questioning under the new
questionnaire, which generally registered
more labor force activity, especially for
workers who traditionally have more
part-time or irregular work force partici-
pation. That’s why the new survey yielded
a higher labor force participation rate. It
also revealed longer durations of unem-
ployment, a higher proportion of
unemployed people re-entering the work force, and a lower
proportion of new entrants. 
Because the U-6 was first published in 1996, it is not pos-
sible to compare recent underemployment rates to those in
earlier severe downturns such as the 1982 recession. For
instance, marginally attached workers were not included in
unemployment measures prior to the 1994 redesign. The BLS
also tightened the definition of discouraged workers, which
reduced their numbers considerably after the CPS redesign.
However, one element of the underemployment rate can be
compared to earlier downturns — the level of involuntary
part-time workers. That figure, which can be traced back to
1955, is higher today than at any point since then.
Over time, the gap between unemployment and under-
employment rates has remained fairly constant in
percentage terms, according to BLS data. However, the
severity of the current recession could produce some signif-
icant short-term structural changes in the labor market.
Monitoring the unemployment and underemployment rates
will be important both during the current downturn and the
recovery following it.  RF
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JARGONALERT
Underemployment
BY DAVID VAN DEN BERG 
I
s it merely a coincidence that living standards rose
sharply and absolute poverty declined while the world
embraced free market policies beginning in 1980?
That’s the question Harvard University economist Andrei
Shleifer ponders in this essay. 
He names the period between 1980 and 2005 as the “Age
of Milton Friedman” to acknowledge the adoption — 
at least in modified form — of many of the late Nobel 
laureate’s market-oriented proposals. The policies pursued
in that spirit include capital market deregulation, the 
lowering of trade barriers, inflation-conscious monetary
policy, the adoption of flexible exchange rates, and tax cuts.
It’s hard to argue that these policies didn’t at least 
have some positive effect. As Shleifer points out, they corre-
sponded to substantial increases
in the rate of growth in per-capita
GDP worldwide and it’s quite
likely that they were the main
drivers of the growth. The 
countries for which market liber-
alization policies provided the
best relative return were those
that were once the most heavily
regulated, such as the countries
of East and South Asia. (Aggregate growth trends mask a 
few key differences between regions. Rapid growth in Asia 
towers above slow growth in Latin America and stagnation 
in Africa.) 
The triumph over runaway inflation and high punitive
tax rates was evident during the Age of Friedman. The world
median annual inflation rate declined from 14.3 percent in
1980 to 4.1 percent in 2005. Marginal income tax rates
dropped from the population-weighted average of 65 per-
cent in 1980 to 36.7 percent in 2005. 
Markets became more international in scope due to a
weakening of trade barriers too. Tariff rates fell from the
population-weighted world average of 43 percent in 1980 to
13 percent in 2004. As formal goods markets become more
free, black market activity declined. 
The benefits of abandoning dirigistic policies have
become clear to many in the developed world and this, in
turn, has raised people’s hopes and expectations. Shleifer
recounts a trip he took to Chile a decade ago. At that time,
the ambition of policymakers was to overtake Argentina. In
2007, policymakers wanted to match the growth of Australia
and New Zealand.
Yet some scholars, most notably Columbia University
economist and Nobel Prize winner Joseph Stiglitz, remain
skeptical that free market policies are, in fact, good for the
countries adopting them. For instance, these economists 
do not necessarily look askance at capital controls or see
price stability as an important precondition to economic
growth.
A recent book co-authored by Stiglitz, surveyed by
Shleifer in this essay, seeks to make the case for significant
state intervention in developing economies. Yet, Shleifer
argues, the evidence offered is not persuasive. On inflation,
for instance, their argument often amounts to a straw man,
Shleifer maintains. Stiglitz and his co-authors see advocates
of zero inflation as their main opposition when that point of
view isn’t held by most market-oriented economists, who
argue that a certain level of inflation might need to be toler-
ated, at least in the short run. Meanwhile, Stiglitz and his
co-authors are incautious when
they “express little concern for 
the huge costs that high inflation
has brought to countries that lost
control of their fiscal policy,
including many Latin American
and transition economies.” 
Stiglitz and his co-authors also
favor capital controls as a way to
stem swings in speculative capital
investment. As Shleifer notes, they lean heavily on the exam-
ple of Malaysia as a country that imposed such controls and
was able to escape the Asian financial crisis of the 1990s. Yet
that example is still controversial as recent analysis has
failed to find that these controls had macro-economic bene-
fits. Instead, Shleifer suggests that such controls encouraged
misallocation of capital and political corruption. 
Shleifer reminds us that we must be careful to learn 
the right lessons from the experiences of developing
economies. The transition to a more free market system
“has taught us that economic and political disorganization,
combined with obsolete human capital of both economic
agents and politicians, can sharply slow down the economic
turnaround.” The other obvious problem facing the devel-
oping world now, he writes, is the lack of new business
investment — a phenomenon that must be tied to the lack
of institutional barriers to arbitrary political power which
spawns predatory regulatory and fiscal policies. 
“On strategy, economics got the right answer: free 
market policies, supported but not encumbered by the 
government, deliver growth and prosperity,” Shleifer con-
cludes. “And while a lot has been accomplished in the last
quarter century, a lot remains to be done.” In short, the prin-
ciples to which Milton Friedman devoted his career can
continue to provide a suitable policy guide in the future.  RF
Have Free Markets Failed Us? 
BY STEPHEN SLIVINSKI
RESEARCHSPOTLIGHT 
ont 65
“The Age of Milton Friedman” by
Andrei Shleifer. Journal of Economic
Literature, March 2009, vol. 47, 
no. 1, pp. 123-135.
 

Research spotlight: Have free markets failed us?

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Research spotlight: Have free markets failed us?

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