There are a number of different ways to measure America’s unemployment levels.
When people talk about the unemployment rate, they’re referring to what’s technically known as the U-3 rate. It’s simply the total number of unemployed people as a share of the civilian labor force.
At 4.1% in March, it was the lowest since December 2000.
But it’s incomplete. The alternative U-6 rate includes people who work part-time but would prefer full-time jobs, and those who are so discouraged they’ve given up on job hunting. It’s also referred to as underemployment.
At 8.2% in March, it was much higher than the official rate.
There’s a perennial debate over which is a better gauge, but perhaps more interesting is the gap between them.
The spread between the U-6 and U-3 unemployment rates fell to 3.9% in March, a level also touched in October and November 2017, and the lowest since November 2007, one month before the US economy entered the Great Recession.
Both tend to move in the same direction, but their gap has shrunk since the recession as underemployment has also decreased. The implications for the economy are underrated, according to Tobias Levkovich, Citi’s chief US equity strategist.
“I think people have been under-appreciating what’s been going on in the labor force, where we’ve been hearing from companies for a while now how tight it is to get good workers,” Levkovich told Business Insider in a recent interview.
Lower underemployment means fewer discouraged workers, which means fewer people available for hire.
“When you look at the gap between U6 and U3 unemployment rates, it tends to be a really good measure for what happens to wage inflation,” Levkovich said. “And it is likely that that gap is going to shrink, based on some outlooks we’ve done, in the course of the next six to nine months. And that’s going to put even more upward pressure [on wage inflation.]”
Companies are already paying up to hire and retain staff. Last week Friday, the Labor Department said the employment-cost index, a gauge of compensation costs, increased at a 2.7% annual rate in Q1, the strongest pace since the third quarter of 2008. “The comfort level that people have in wage growth [as measured by average hourly earnings] of February and March in the 2.6%-2.7% range is probably very inaccurate,” Levkovich said.
Some of those higher costs for employers could mean higher prices consumers, or inflation, he added.
Higher pay puts more cash in Americans’ pockets, adding to the gains from tax cuts. It could also mean higher bond yields. And over in the stock market, the 10%-plus plunge earlier this year after a big wage-growth report showed what can happen when investors take account of a safer asset that’s offering higher returns.
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