The Rise and Fall of American Growth

Last week the Bureau of Labor Statistics (BLS) released the most recent unemployment statistics for April. No surprises in the umployment rate were experienced with the rate holding steady at about 5% over the past eight months and down from 5.4% in April of 2015. Each month the BLS reports these figures and each month the media spends a fair amount of time debating the relevance of the changes experienced and what these changes may indicate about our economy. It’s amazing how such a “simple” statistic can cause so much national debate and can be a central actor used by decision-makers to guide future policy decisions. However, coming up with this statistic is far from “simple”.1 Moreover, few American’s understand just what makes up the components of this macro-economic indicator. This post, hopefully, will help shed some light on this latter issue.


Measuring the Unemployed

How well an economy uses its resources is a major aspect of economic performance; and one of the most important resources is people. Consequently, keeping people employed is a major concern for policymakers and the unemployment rate provides understanding regarding this in addition to providing an indication of labor market conditions. For instance, low unemployment rates reflect job availability and the potential for wage growth whereas high unemployment rates signal economic hardship for individuals who need to earn a living and seek work. To provide these insights the unemployment rate measures the percentage of people “wanting” to work who do not have jobs. More technically, it is the percentage of the unemployed in the civilian labor force.

To measure the unemployed, among other statistics, the BLS conducts the Current Population Survey (CPS). The CPS surveys 60,000 households across the U.S., translating to approximately 110,000 individuals each month. The sample is selected to best represent the U.S. population by demographics (i.e. age, race, sex, vocation) and geography (i.e. region, state, urban, rural). Households included in the sample are on a 16 month rotation in which they are interviewed for 4 consecutive months, removed from the sample for 8 months, and then re-interviewed for 4 additional months before being removed from the sample permenantly. The households being surveyed are on a staggered rotation so that every month 25% of the households in the sample are changed; meaning that from month-to-month 75% of the households surveyed remain the same and year-to-year 50% of the households surveyed remain the same. This means the the month-to-month and year-to-year changes can be considered quite reliable.

The objective of the CPS is to categorize each adult in the household into one of three buckets - employed, unemployed, or not in the labor force. This is done through a series of questions asked either in-person or over the phone. These questions cover personal characteristics (i.e. demographics) and then covers a series of questions that will determine the persons’ categorization. So rather than the person stating whether they are employed or not, the answers to the questions will determine which category they fall into. And it are these categories that I want to clarify but to do so, I want to start by outlining the big picture - what constitutes the “adult” population and the civilian labor force - and then I’ll discuss what determines the three categories.


Adult Population

The CPS is targeted towards adults but exactly who does this cover? Well, it targets individuals age 16 and over with no upper age limit. As a general rule, the FLSA sets 14 years of age as the minimum age for employment but limits the number of hours worked by minors under the age of 16. So the CPS and unemployment rate are meant to measure those individuals who are not restricted to only a limited amount of work due to age. However, the CPS also excludes a group referred to as “institutional”” - those living in mental and health institutions (approximately 500,0002), active-duty armed forces (approximately 1.3 million3), and those incarcerated (approximately 2.2 million4).

So, of the 323.5 million people in the U.S., we take the 257 million individuals that are age 16+, exclude the 4 million individuals classified as “institutional” and this makes up the adult population of concern - also called the civilian noninstitutional population.


Not in Labor Force

From the civilian noninstitutional population, the next objective is to identify the number of people actively engaged in the labor force. The reason for this is we want to identify those people that are employed or unemployed who are actively “wanting” to work. Therefore, we need to exclude persons who are:

  • retired
  • students
  • those taking care of children or other family members
  • others who are neither working nor seeking work

In April, we had about 37% of the civilian noninstitutional population not actively engaged in the labor force, taking us back to 1978 levels.

Labor Participation Rate

However, its important to keep in mind that individuals in this category are not the same. On one hand you have individuals that are retired, full-time students, or stay at home mom’s that have no desire to currently be engaged in the labor force. However, there are individuals who desire to work but do not meet the technical definition of being actively engaged in the labor force. This includes:

Marginally attached workers: these individuals want and are available for work and have looked for a job sometime in the prior 12 months. However, they are not counted as unemployed because they have not actively searched for work in the past 4 weeks. This may be due to family complications, limited transportation, lack of identified jobs of interest, etc.

Discouraged workers: these individuals are a subset of marginally attached workers who are not currently looking for work because they believe no job is available in their specialty area, face some type of discrimmination, or lack necessary education or experiences. Consequently, these folks want to work but have given up looking for employment.

The number of persons who were marginally attached to the labor force or discouraged increased sharply during the recent recession, rising to 2.1 million in the first quarter of 2009. Its important to understand when individuals move from the labor force category into one of these categories it impacts the unemployment rate because they are being reclassified as not in the labor force and, therefore, not included in the unemployment rate calculation. However, despite some people arguing that the unemployment rate is much higher because these individuals are excluded, and despite the fact that this category does increase sizably during recessions, “typically fewer than 1 in 10 people not in the labor force reported that they want a job.”5

So now that we’ve identified the individuals excluded from the labor force, we now have the remaining civilian labor force population identified from which we want to determine persons as employed or unemployed.


Employed

Individuals in the civilian labor force are considered employed if they did any work at all for pay or profit during the survey reference week.6 This includes all part-time and temporary work, as well as regular full-time, year-round employment; an individual could do as little as 1 hour of paid work and they will be categorized as employed. Also, individuals who perform 15+ hours of unpaid work for a family business or farm are also categorized as employed. Lastly, Individuals are counted as employed if they have a job at which they did not work during the survey week, whether they were paid or not, but have a specific job to which they will return. This includes individuals that are:

  • On vacation
  • Ill
  • Experiencing child care problems
  • On maternity or paternity leave
  • Taking care of some other family or personal obligation
  • Involved in a labor dispute
  • Prevented from working by bad weather


Unemployed

And finally, the individuals that remain can be classified as unemployed. These are the individuals that do not have a job but have actively looked for work in the prior 4 weeks and are currently available for work. To be considered as actively looking for work, individuals must perform one of the following:

  • Reaching out to individuals or organizations for work:
    • An employer directly or having a job interview
    • A public or private employment agency
    • Friends or relatives
    • A school or university employment center
  • Submitting resumes or filling out applications
  • Placing or answering job advertisements
  • Checking union or professional registers

This obviously excludes individuals who are only passively looking for work by merely reading job advertisements or attending job training programs. To be considered as available for work, individuals be able to go to work during the survey reference week given a job was offered barring only temporary illness (i.e. an individual is offered a job but can’t start until next week because of they have the flu).

Therefore, the unemployment rate includes people who have quit their jobs to look for other employment, workers whose temporary jobs have ended, individuals looking for their first job, and experienced workers looking for jobs after an absence from the labor force (i.e. stay-at-home parents who return to the labor force after their children have entered school).

Unemployment Rate


Wrap-up

Hopefully this clarifies (for some at least) just what makes up the components of the unemployment rate so that in the future, when the monthly unemployment rates are released and the media discussions ensue, you can have a more thorough understanding regarding the information hidden in the statistic.

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1. You can find the comprehensive documentation on the technical methodologies employed to collect data and compute the unemployment rate here. "↩" </P>

2. In 2009 the National Council on Disability identified 469,123 people receiving services while living in institutions. "↩" </P>

3. Even some of the 811,000 reserve personnel would be excluded as the CPS excludes all full-time armed forces personnel and some of the reserve personnel are full-time. "↩" </P>

4. Prison Policy Initiative identified 0.2 million in federal prisons, 1.4 million in state prisons, and 0.6 million in local jails. This excludes the 34,000 youth that are locked up. "↩" </P>

5. In April only 5% of the non-labor force reported they want a job and the BLS reported that since 1990, the average has been less than 10%."↩" </P>

6. The survey reference week is usually the week that includes the 12th of the month. "↩" </P>