Unemployment Index: A Multidimensional Measure of Labor Market Efficiency

The unemployment rate, which is measured by the Bureau of Labor Statistics as the proportion of labor force participants who are classified as being unemployed, is a traditional statistic that is used to evaluate labor market conditions. This conventional measure of unemployment considers incidence of unemployment and is a one-dimensional view of the unemployment experience. This analysis develops an alternative measure for evaluating labor market conditions that incorporates duration of unemployment. By aggregating the time that an individual is unemployed across the labor force, a measure of the gap between actual weeks of labor and potential weeks of labor is created. This ratio is then decomposed into familiar components of unemployment, incidence and duration. Incidence refers to the likelihood of experiencing unemployment and duration refers to the length of time spent unemployed. This framework provides a basis for creating an "unemployment index" in which the different components of unemployment are highlighted and used together as an indicator of labor market efficiency. Such an index can be useful for policy purposes when both incidence and duration are relevant in assessing economic conditions as well as in comparing the unemployment experience between different groups, identified by gender, race, age, state/regional residence, industry classification, or occupational classification.