Why Underemployment May Be Worse Than It Looks

Job seekers wait in line to meet with employers at the 25th Annual CUNY big Apple Job and Internship Fair at the Jacob Javits Convention Center
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Job seekers wait in line to meet with employers at the 25th Annual CUNY big Apple Job and Internship Fair at the Jacob Javits Convention Center

The level of underemployed workers looks bad on its face but even worse when it's not the government doing the counting.

When the Labor Department released its monthly nonfarm jobs report Friday, it was all sunshine and roses except for one glaring weakness: A big jump in the underemployment rate that includes those who have quit working as well as those who have had to take part-time jobs even though they'd rather work full-time.

That rate, which economists call the U-6, jumped from 13.8 percent in May to 14.3 percent in June—a 3.6 percent increase and indicative that the 195,000 new jobs created in the month weren't exactly of the highest caliber.

(Read More: Job Growth Posts Large Gain in June; Rate Holds)

But what often doesn't get as much attention is the monthly labor count that the experts at Gallup conduct.

According to the pollster's results, the underemployment situation is even worse.

Gallup reports that 17.2 percent of the workforce is underemployed, a startling number compounded by its divergence from the government's count. While the rate is down from the 20.3 percent peak in March 2010, it has remained maddeningly high over the past three years even as economists tout the strength of the U.S. economic recovery.

From a broader perspective, the Gallup measure actually has increased from its 15.9 percent multi-year low in October 2012.

The potential significance of the recent trough is that it came a month before the Federal Reserve launched the third round of quantitative easing, the $85 billion a month bond-buying program that is supposed to help the central bank achieve its dual objectives of price stability—and full employment.

Amid questions of whether QE3 is about to come to end, and if it has been as effective as its predecessors, the underemployment rate will be one important metric to watch.

Aside from the Gallup numbers, the government's report was discouraging in its own right: A jump from 28.5 percent to 29.3 percent for the percentage of those working part-time for economic reasons in the labor force, and a year-over-year surge of 25.1 percent—1.027 million total—for those "discouraged workers" who have quit searching for jobs.

"It's a big deal. The labor market is far from healthy, so I don't want to minimize the fact" that underemployment is on the rise, said Joe LaVorgna, chief U.S. economist at Deutsche Bank.

(Read More: Will the Obamacare Delay Spur a Hiring Boom?)

"To me, it's something that bears watching," he added. "Given the month it occurred, we have tremendous exit and entry into the workforce—teachers and students. You really need to reserve judgment. You need another month or two to see if it's a new trend."

Indeed, some of the other Gallup metrics point to a bit brighter labor picture.

The firm's adjusted unemployment rate, which in the past has diverged substantially from the BLS count, stood at 7.6 percent in June, directly in line with the government's numbers and down substantially from May's 8.2 percent reading.

Also, its payroll-to-population gage was at 44.8 percent, a 2013 high though below the 45.7 percent in late 2012.

But the labor market faces clear pressure ahead, particularly from government sequestration spending cuts and uncertainty over the looming Obamacare implementation.

(Read More: Jobless About to Take a Big Hit From the Sequester)

"We expect labor market pressure from the spending sequester in Washington to spread from reduced hours to job cuts," Ethan Harris, global economist at Bank of America Merrill Lynch, said in a report for clients.

For now, though, LaVorgna said he is attributing the data point discrepancies to an unusual jobs climate that will out the kinks in the months ahead.

"The labor market is so far from normal that it wouldn't surprise me that all these metrics are not necessarily moving in the same direction," he said. "There's going to be some incongruity between these two series. When things normalize, you would expect these things to rectify themselves."

By CNBC's Jeff Cox. Follow him @JeffCoxCNBCcom on Twitter.