Trends and Cycles in U.S. Labor-Market Slack, 1994–2019

Janet Yellen, former Chair of the Federal Reserve, intimated that the official unemployment rate (U3) is an inadequate measure of labor market slack when she highlighted the “possibility… that labor market slack is not appropriately measured by the civilian unemployment rate” (2019). Thus, we explore the difference between U3 and a more inclusive estimate of unemployment, U6, in order to understand the extent to which U3 misinforms the public, policy makers, and researchers.We find that the gap varies substantially over the business cycle and especially so for the most vulnerable – minorities, youth, and the less educated. This is because these groups are most likely to work part-time involuntarily the longest after the end of a recession and therefore bear the brunt of the burden of its lingering impact for many years thereafter. For African Americans, for instance, it took 7 years and 4 months longer for the recession of 1990/1991 to end. After the Great Recession the Hispanic gap also remained at an elevated level of 10 percentage points from October 2009 through June 2013. In January 2011 U6 climbed to 47.5% among African American youth and the U6-U3 gap was 18 percentage points and was similarly large among African Americans without a high-school diploma. In other words, not only does U3 mislead but the degree to which it does so varies greatly by ethnic group.