♪ [music] ♪ [Alex] As we saw in our last video,
to be defined as unemployed, a person has to be without a job and they must have
actively looked for a job in the last four weeks. Now what this means is that if a person without a job
gives up looking for work, then they are no longer
counted as unemployed. Every now and then
someone discovers this definition, and they call
the unemployment rate a fraud, a big lie, even a conspiracy. These melodramatic claims
are often made for political reasons, when someone wants to argue
that the real unemployment rate is higher than
the official unemployment rate. Do these claims hold up? Well, there is nothing sinister about the official definition
of unemployment. If someone says they want a job, but they aren't
actively looking for work, it's hard to count them
as unemployed. For example, recently the boxer,
Floyd Mayweather, he retired. Is he now unemployed? It seems he doesn't want a job. But Floyd also says
that if he was paid enough he'd fight again. [Floyd] If I came back. Of course, it would have to be
a nine-figure payday . . . [Alex] But lots of retired people --
they'd take a job if they were offered enough money. So, are all retired people
unemployed? Maybe, but that wouldn't be a very useful definition
of unemployment. So, it’s quite reasonable
to define someone as unemployed only if they don't have a job
and they’re actively seeking a job. At the same time, there is nothing sacrosanct
about the official definition. It's quite legitimate
to look at other measures of the state of the workforce, such as wage growth
or labor force participation rate. We'll discuss those
in future videos. It's even perfectly legitimate
to look at other ways of defining unemployment. In fact, the Bureau
of Labor Statistics defines and measures six unemployment rates, called U1 through U6. The official unemployment rate,
the one we have defined, is U3. U1 and U2 are more stringent
definitions of unemployment. U1, for example, counts
someone as unemployed only if they have been out of work
for 15 weeks or longer. U4, U5 and U6 are
less stringent definitions. For example, the BLS defines
“discouraged workers” as people who say they want a job, but although they haven't looked
for work in the past four weeks, they have looked in the past year. If we add these discouraged workers
to the unemployed workers, we can define
a new unemployment rate: U4. Here it is. Including discouraged workers increases the unemployment
rate slightly, but the two rates
move together very closely. Indeed, as a general rule, most of the alternative definitions
of unemployment track each other closely. So, if things are getting worse
by one measure, they are usually getting worse
by all measures. The same is true when things
are getting better. The U4, U5, and U6 definitions
of unemployment -- they do give a higher number
for the unemployment rate than does the official rate. But they always give
a higher number. So, if things are worse today
by the alternative measure, then they were also
worse in the past, in whatever golden age
you want to compare with. Then using any definition
consistently -- that's okay. But it’s not okay to use
the official unemployment rate when your favorite president
is in power and then use an alternative,
higher rate when your least favorite
president is in power. The bottom line is
that even if you think that the official definition
of unemployment is too strict, and you think that
the real unemployment rate is higher than the official rate -- even so, the official unemployment
rate is still a good indicator of the state of the labor market, and whether things are
getting better or getting worse. In the next video,
we’re going to take a look at three different types,
or causes, of unemployment: frictional, structural
and cyclical unemployment. [Narrator] If you want
to test yourself, click “Practice Questions.” Or, if you’re ready to move on, you can click
“Go to the Next Video.” You can also visit MRUniversity.com to see our entire library
of videos and resources. ♪ [music] ♪