Unemployment

When people are unemployed, individual workers, their families, and the economy all suffer. Workers lose wages, and the economy loses what they could have produced. Consumer spending drops, and as we will see in later chapters, this drop in consumer spending can have a ripple effect, leading other workers to lose their jobs.

The Historical Record

The Census Bureau began collecting data on wages and earnings in the early 19th century, but it took the Great Depression to focus national attention on the need for consistent data on unemployment rather than specific instances of things such as factory closings. By the 1940s, the Department of Labor began collecting employment data using monthly surveys to get a more detailed picture of the labor force. As the Bureau of Labor Statistics has noted,

A 1946 Census Bureau poster encouraging compliance with the initial unemployment survey.

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Once the BLS has collected and processed the current employment statistics, policymakers use this information to craft economic policies. Before we discuss how these statistics are defined, collected, used, and made accurate, let’s briefly look at the historical record of unemployment and its composition.

Figure 2 shows unemployment rates for the last century. Unemployment has varied from a high of 25% of the labor force in the middle of the Great Depression to a low of just over 1% during World War II. Unemployment during the past 50 years has tended to hover around the 5% to 6% range, although it reached 10% during the 1981–1982 and 2007–2009 recessions.

A Century of Unemployment (1912–2012) Over the last century, unemployment has varied from a high of 25% of the labor force in the middle of the Great Depression to a low of just over 1% during World War II. Unemployment during the past 50 years has tended to hover around the 5%–6% range.

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Table 2 shows a breakdown of unemployment among various groups by gender, race, and education for 1980, 1990, 2000, and 2012. For blacks, unemployment has tended to be about double the rate of white unemployment, and the unemployment rate for Hispanics has usually exceeded that for whites by roughly 50%. Unemployment for college graduates is consistently low. Roughly half of all unemployment is normally from job losses, but this rose to two-thirds during the 2007–2009 downturn. The next largest group involves people who have not worked in some time and are looking to reenter the labor force. Finally, those people who quit their jobs or are new entrants into the labor force constitute a small percentage of the unemployed.

Now that we have some idea of the composition of the unemployed, let us consider just how these numbers are compiled. First, we need to examine how people get categorized as employed or unemployed.

Defining and Measuring Unemployment

The three major monthly numbers the BLS reports are the size of the labor force, number of people employed, and number unemployed. The unemployment rate is the number of people unemployed divided by the labor force.

Employed People are counted as employed if they have done any work at all for pay or profit during the survey week. Regular full-time work, part-time work, and temporary work are all included. People who have a job, but are on vacation, ill, having child care problems, on maternity or paternity leave, on strike, prevented from working because of bad weather, or engaged in some family or personal obligation are treated as employed. These people are considered to be employed because they have jobs to return to once their temporary situations have been resolved.

One other group, called unpaid family workers, is considered to be employed. These are people who work 15 or more hours a week in a family enterprise; they usually show up in agriculture and retail. Unpaid family workers who work fewer than 15 hours a week are not counted as employed.

Unemployed People are counted as unemployed if they do not have a job, but are available for work and have been actively seeking work for the previous four weeks. Actively looking for work includes efforts such as responding to online job ads, sending off résumés, scheduling job interviews, visiting school placement centers, and contacting private or public employment agencies.

Note the emphasis on being active in the job search. A passive job search that merely involves browsing online employment openings or talking to friends about jobs is not enough to characterize someone as unemployed. One exception involves workers who have been laid off but are expecting to be recalled; they do not need to seek other work to count as being unemployed. Aside from the only other exception—namely, people suffering a temporary illness—individuals must be engaged in a job search to be counted as unemployed.

Labor Force The labor force is the total number of those employed and unemployed. The unemployment rate is the number of unemployed divided by the labor force, expressed as a percent.

The measurement of the labor force has important implications for the unemployment rate. To be counted in the labor force, one must either be employed or not employed but actively seeking work. As a result, a number of groups are not included in the labor force, including full-time students, retirees, children, and persons serving time in prison. If a person within these categories is not working, he or she is not counted in unemployment statistics because he or she is not in the labor force. A discussion of how changes in the labor force affect the unemployment rate appears later in this section.

Monthly Employment Surveys

The Census Bureau and the Department of Labor conduct different surveys to measure employment. The Census Bureau surveys households and the U.S. Department of Labor focuses on the payrolls of businesses and government agencies to produce their monthly reports.

The Household Survey Every month the Census Bureau, as part of the Current Population Survey, contacts roughly 60,000 households to determine the economic activity of people. The sample is drawn from over 700 geographical areas intended to represent the entire country, including urban and rural areas. The survey includes self-employed workers, unpaid family workers, agricultural workers, private household workers, and workers absent without pay.

The Census Bureau does not directly ask interviewees if they are employed. Rather, it asks a series of questions designed to elicit information that permits the Bureau to determine by its own standards whether people are employed or unemployed and whether they are in the labor force.

The Payroll Survey The payroll, or “establishment,” survey focuses on roughly 400,000 companies and government agencies that are asked how many employees they currently have. If jobs are cut, this survey will immediately show a decrease in the number of employees.

According to the Bureau of Labor Statistics, “Both the payroll and household surveys are needed for a complete picture of the labor market. The payroll survey provides a highly reliable gauge of monthly change in nonfarm payroll employment. The household survey provides a broader picture of employment including agriculture and the self employed.”5

The household survey provides a detailed demographic picture of the labor market and captures entrepreneurial activity missed by the payroll survey. In contrast, the payroll survey provides detailed information by industry and region of the country. Because the payroll survey has a larger sample, it is generally viewed as the most accurate gauge of employment and unemployment changes, but both surveys closely track each other.

Employment Trends

The surveys described in the previous section are important measures of employment and unemployment for the country as a whole as well as for individual states and cities included in the surveys. However, investors and economists are interested in trends in employment and how they affect the overall health of the economy. Although major companies are highlighted in the news for their decisions on hiring and layoff decisions, the majority of jobs in the country are generated by small and mid-sized companies. These employment decisions fluctuate often, and therefore investors are interested in statistics that might capture these short-term trends.

Weekly Jobs Report One report that has gained increasing attention is the Unemployment Insurance Weekly Claims Report, more commonly referred to as the Weekly Jobs Report, released by the U.S. Department of Labor each Thursday. The Weekly Jobs Report contains an estimate of the number of persons filing for unemployment benefits for the first time, and is used as a way to estimate trends in layoffs and in hiring. Economists are interested in seeing how the weekly data change from week to week. These data provide a more immediate estimate of unemployment than waiting for the monthly survey report.

Relationship Between Employment and the Unemployment Rate People often generalize the negative relationship between employment and the unemployment rate. Although these terms are negatively related, the relationship is not perfect. For example, it is possible for employment to grow and the unemployment rate to increase at the same time. Recall that the unemployment rate measures the number of people unemployed and seeking work divided by the labor force. The important point to highlight here is that the labor force is constantly changing.

The labor force changes for many reasons. For example, the labor force in the United States grows by around 1.5 million persons each year just from population growth (from natural births as well as from immigration). Therefore, even without considering any other factor influencing the labor force, the United States needs to generate numerous new jobs just to keep the unemployment rate steady. Further, people enter and leave the labor force for many reasons—college, retirement, family reasons, or just frustration with the job market. As a result of these factors, the unemployment rate is not perfectly correlated with employment numbers, as we will analyze in greater detail next.

Problems with Unemployment Statistics

Trying to measure personal situations as complex as employment, unemployment, and job seeking can be expected to generate its share of controversy and criticism. When the Department of Labor announces its results each month, commentators often note that these numbers understate unemployment, because they do not include chronically unemployed workers who have grown so frustrated and discouraged that they have dropped out of the labor force. Media pundits agonize over the plight of discouraged workers or the underemployed while discussing the impact of the latest numbers on the stock market.

How unemployment is measured depends on the intended use of the resulting measurements. Various uses for unemployment statistics include (1) gauging the state of the economy, (2) determining the divergence of supply and demand in labor markets, and (3) assessing the distribution of unemployment and the extent to which people are suffering from being out of work. In the United States, most unemployment statistics have been developed to gauge the state of the economy. The Bureau of Labor Statistics does, however, publish data about underemployment and discouraged workers.

Underemployment and Discouraged Workers It is not uncommon for people to take jobs that do not fully use their skills. In the early 1990s, many engineers and skilled workers who were employed in the defense industry saw their careers fall apart with the collapse of the Soviet Union. The “peace dividend” most people enjoyed generated excess supplies in defense-related labor markets. In the early 2000s, the collapse of many Internet start-ups and telecommunications firms eliminated the jobs of many highly skilled workers. More recently, the recession caused by the collapse of the housing market and the subsequent financial crisis put large numbers of construction, real estate, and Wall Street workers out of work.

As a result of these shake-ups, many people are unable to find jobs that enable them to duplicate their past standards of living. These individuals are underemployed in that they are forced to take jobs that do not fully—or in some cases even remotely—exploit their education, background, or skills.

Consider the following situation. After being laid off at the beginning of a recession, you spend several months looking for work, until finally you conclude that landing a job in the current downturn is impossible. You give up looking for work. Are you still unemployed? Not according to official statistics. Clearly, you would like to resume working; you have simply despaired of doing so anytime soon. Sufficiently discouraged to have quit actively seeking work, the BLS classifies you as being out of the labor force.

The deeper a recession, the more discouraged workers there will be. Today, the Census Bureau asks other questions of respondents to determine whether they fit into the discouraged worker category, listing these results separately.

Data from the Bureau of Labor Statistics in Figure 3 shows a breakdown of underemployment and discouraged workers. Discouraged workers who have given up looking for work due to poor employment prospects increase unemployment rates by a small amount. The same is true for other marginally attached workers—those who were available for work and actively looked for work during the last 12 months, but not in the last four weeks of the survey. The biggest group missing from the reported unemployment rate are those working part time for economic reasons. They would prefer a full-time job but have been unable to land one. Adding all of these categories nearly doubles the unemployment rate.

Unemployment Categories (2000–2012) The Department of Labor categorizes unemployment into those unemployed and still actively seeking work, those who are discouraged (have quit looking), those who are marginally attached (those who looked for work in the past 12 months but not the last four weeks), and those working part time but who would prefer full-time work.

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Other countries have different definitions of actively seeking work, classifying individuals engaged in passive job searches as unemployed. Notably, Canada and Europe have more relaxed search standards than the United States.