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Unemployment Index: A Multidimensional Measure of Labor Market Efficiency

  • Della Lee Sue
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    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.

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    Article provided by New York State Economics Association (NYSEA) in its journal New York Economic Review.

    Volume (Year): 39 (2008)
    Issue (Month): 1 ()
    Pages: 44-69

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    Handle: RePEc:nye:nyervw:v:39:y:2008:i:1:p:44-69
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    1. Toshihiko Mukoyama & Aysegul Sahin, 2004. "Why Did the Average Duration of Unemployment Become So Much Longer?," Working Papers 04002, Concordia University, Department of Economics.
    2. Richard B. Freeman & David A. Wise, 1982. "The Youth Labor Market Problem: Its Nature, Causes, and Consequences," NBER Books, National Bureau of Economic Research, Inc, number free82-1, June.
    3. Robert G. Valletta, 1998. "Changes in the structure and duration of U.S. unemployment, 1967-1998," Economic Review, Federal Reserve Bank of San Francisco, pages 29-40.
    4. Larry DeBoer & Michael C. Seeborg, 1989. "The unemployment rates of men and women: A transition probability analysis," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 42(3), pages 404-414, April.
    5. Nancy S. Barrett & Richard D. Morgenstern, 1974. "Why Do Blacks and Women Have High Unemployment Rates?," Journal of Human Resources, University of Wisconsin Press, vol. 9(4), pages 452-464.
    6. Rob Valletta, 2002. "Recent trends in unemployment duration," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue nov22.
    7. Baker, Michael, 1992. "Unemployment Duration: Compositional Effects and Cyclical Variability," American Economic Review, American Economic Association, vol. 82(1), pages 313-21, March.
    8. Lisa Barrow, 2004. "Is the official unemployment rate misleading? a look at labor market statistics over the business cycle," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q II, pages 21-35.
    9. Rob Valletta, 2003. "Extended unemployment in California," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue feb28.
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