1.1 Module 13: Defining Unemployment

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The Unemployment Rate

One of the most important issues in both the 2008 and 2012 presidential elections was the high unemployment rate. Figure 13-1 shows the U.S. unemployment rate from 1948 to 2013. As you can see, the labor market hit a difficult patch starting in mid-2008, with the unemployment rate rising from 4.8% in February 2008 to 10.1% in October 2009. What did the rise in the unemployment rate during the Great Recesssion mean, and why was it such a big factor in people’s lives? To understand why policy makers pay so much attention to employment and unemployment, we need to understand how both are defined and measured.

The unemployment rate has fluctuated widely over time. It always rises during recessions, which are shown by the shaded bars. It usually, but not always, falls during periods of economic expansion.

Source: Bureau of Labor Statistics; National Bureau of Economic Research.

Defining and Measuring Unemployment

It’s easy to define employment: you’re employed if and only if you have a job.

Unemployment, however, is a more subtle concept. Just because a person isn’t working doesn’t mean that we consider that person unemployed. For example, in November 2013 there were 42 million retired workers in the United States receiving Social Security checks. Most of them were probably happy that they were no longer working, so we wouldn’t consider someone who has settled into a comfortable, well-earned retirement to be unemployed. There were also 14 million disabled U.S. workers receiving benefits because they were unable to work. Again, although they weren’t working, we wouldn’t normally consider them to be unemployed.

The U.S. Census Bureau, the federal agency that collects data on unemployment, considers the unemployed to be those who are “jobless, looking for jobs, and available for work.” Retired people don’t count because they aren’t looking for jobs; the disabled don’t count because they aren’t available for work. More specifically, an individual is considered unemployed if he or she doesn’t currently have a job and has been actively seeking a job during the past four weeks. So the unemployed are people who are actively looking for work but aren’t currently employed.

A country’s labor force is the sum of the employed and the unemployed—that is, the people who are currently working and the people who are currently looking for work. The labor force participation rate, defined as the share of the working-age population that is in the labor force, is calculated as follows:

The unemployment rate, defined as the percentage of the total number of people in the labor force who are unemployed, is calculated as follows:

To estimate the numbers that go into calculating the unemployment rate, the U.S. Census Bureau carries out a monthly survey called the Current Population Survey, which involves interviewing a random sample of 60,000 American families. People are asked whether they are currently employed. If they are not employed, they are asked whether they have been looking for a job during the past four weeks. The results are then scaled up, using estimates of the total population, to estimate the total number of employed and unemployed Americans.

The Significance of the Unemployment Rate

Only those without a job and actively seeking work are considered to be unemployed.

AP Photo/Bob Child

In general, the unemployment rate is a good indicator of how easy or difficult it is to find a job given the current state of the economy. When the unemployment rate is low, nearly everyone who wants a job can find one. In 2000, when the unemployment rate averaged 4%, jobs were so abundant that employers spoke of a “mirror test” for getting a job: if you were breathing (therefore, your breath would fog a mirror), you could find work. By contrast, in 2009, the unemployment rate in 17 states rose to over 10% (over 15% in Michigan). Even in 2013, with the unemployment rate averaging 7.4%, it was difficult to find work. More than three times as many Americans were looking for work as there were job openings.

Although the unemployment rate is a good indicator of current labor market conditions, it is not a perfect measure. It has been known to overstate or understate the true level of unemployment.

How The Unemployment Rate Can Overstate The True Level Of UnemploymentIf you are searching for work, it’s normal to take at least a few weeks to find a suitable job. Yet a worker who is quite confident of finding a job, but has not yet accepted a position, is counted as unemployed. As a consequence, the unemployment rate never falls to zero, even in boom times when jobs are plentiful. Even in the buoyant labor market of 2000, when it was easy to find work, the unemployment rate was still 4%. Later, we’ll discuss in greater depth the reasons that measured unemployment persists even when jobs are abundant.

How The Unemployment Rate Can Understate The True Level Of UnemploymentFrequently, people who would like to work but aren’t working still don’t get counted as unemployed. In particular, an individual who has given up looking for a job for the time being because there are no jobs available isn’t counted as unemployed because he or she has not been searching for a job during the previous four weeks.

Individuals who want to work but aren’t currently searching because they see little prospect of finding a job given the state of the job market are known as discouraged workers. Because it does not count discouraged workers, the measured unemployment rate may understate the percentage of people who want to work but are unable to find jobs.

Discouraged workers are part of a larger group known as marginally attached workers. These are people who say they would like to have a job and have looked for work in the recent past but are not currently looking for work. They are also not included when calculating the unemployment rate.

Finally, another category of workers who are frustrated in their ability to find work but aren’t counted as unemployed are the underemployed: workers who would like to find full-time jobs but are currently working part time “for economic reasons”—that is, they can’t find a full-time job. Again, they aren’t counted in the unemployment rate.

The Bureau of Labor Statistics is the federal agency that calculates the official unemployment rate. It also calculates broader “measures of labor underutilization” that include the three categories of frustrated workers. Figure 13-2 shows what happens to the measured unemployment rate once marginally attached workers (including discouraged workers) and the underemployed are counted.

The unemployment number usually quoted in the news media counts someone as unemployed only if he or she has been looking for work during the past four weeks. Broader measures also count discouraged workers, marginally attached workers, and the underemployed. These broader measures show a higher unemployment rate, but they move closely in parallel with the standard rate.

Source: Bureau of Labor Statistics.

People who would like to work but have given up searching for a job are not counted as unemployed.

Robin Beckham/BEEPstock/Alamy

The broadest measure of unemployment and underemployment, known as U6, is the sum of these three measures plus the unemployed; it is substantially higher than the rate usually quoted by the news media. But U6 and the unemployment rate move very much in parallel, so changes in the unemployment rate remain a good guide to what’s happening in the overall labor market.

Finally, it’s important to realize that the unemployment rate varies greatly among demographic groups. Other things equal, jobs are generally easier to find for more experienced workers and for workers during their “prime” working years, from ages 25 to 54. For younger workers, as well as workers nearing retirement age, jobs are typically harder to find, other things equal.

Figure 13-3 shows unemployment rates for different groups in December 2007, when the overall unemployment rate of 5.0% was low by historical standards. As you can see, in December 2007 the unemployment rate for African-American workers was much higher than the national average; the unemployment rate for White teenagers (ages 16–19) was more than three times the national average; and the unemployment rate for African-American teenagers, at 33.1%, was over six times the national average. (Bear in mind that a teenager isn’t considered unemployed, even if he or she isn’t working, unless that teenager is looking for work but can’t find it.) So even at a time when the overall unemployment rate was relatively low, jobs were hard to find for some groups.

Unemployment rates vary greatly among different demographic groups. For example, although the overall unemployment rate in December 2007 was 5.0%, the unemployment rate among African-American teenagers was 33.1%. As a result, even during periods of low overall unemployment, unemployment remains a serious problem for some groups.

Source: Bureau of Labor Statistics.

So although the unemployment rate is not an exact, literal measure of the percentage of people unable to find jobs, it is a good indicator of overall labor market conditions. The ups and downs of the unemployment rate closely reflect economic changes that have a significant impact on people’s lives. Let’s turn now to the causes of these fluctuations.

Growth and Unemployment

Compared to Figure 13-1, Figure 13-4 shows the U.S. unemployment rate over a somewhat shorter period, the 35 years from 1978 to 2013. The shaded bars represent periods of recession. As you can see, during every recession, without exception, the unemployment rate rose. The severe recession of 2007–2009, like the earlier one of 1981–1982, led to a huge rise in unemployment.

This figure shows a close-up of the unemployment rate for the past three decades, with the shaded bars indicating recessions. It’s clear that unemployment always rises during recessions and usually falls during expansions. But in both the early 1990s and the early 2000s, unemployment continued to rise for some time after the recession was officially declared over.

Source: Bureau of Labor Statistics.

Correspondingly, during periods of economic expansion the unemployment rate usually falls. The long economic expansion of the 1990s eventually brought the unemployment rate below 4%, and the expansion of the mid-2000s brought the rate down to 4.7%. However, it’s important to recognize that economic expansions aren’t always periods of falling unemployment. Look at the periods immediately following two recent recessions, those of 1990–1991 and 2001 in Figure 13-4. In each case the unemployment rate continued to rise for more than a year after the recession was officially over. The explanation in both cases is that although the economy was growing, it was not growing fast enough to reduce the unemployment rate.

Figure 13-5 is a scatter diagram showing U.S. data for the period from 1949 to 2012. The horizontal axis measures the annual rate of growth in real GDP—the percent by which each year’s real GDP changed compared to the previous year’s real GDP. (Notice that there were ten years in which growth was negative—that is, real GDP shrank.) The vertical axis measures the change in the unemployment rate over the previous year in percentage points. Each dot represents the observed growth rate of real GDP and change in the unemployment rate for a given year. For example, in 2000 the average unemployment rate fell to 4.0% from 4.2% in 1999; this is shown as a value of −0.2 along the vertical axis for the year 2000. Over the same period, real GDP grew by 4.1%; this is the value shown along the horizontal axis for the year 2000.

Each dot shows the growth rate of the economy and the change in the unemployment rate for a specific year between 1949 and 2012. For example, in 2000 the economy grew 4.1% and the unemployment rate fell 0.2 percentage point, from 4.2% to 4.0%. In general, the unemployment rate fell when growth was above its average rate of 3.19% a year and rose when growth was below average. Unemployment always rose when real GDP fell.

Sources: Bureau of Labor Statistics; Bureau of Economic Analysis.

The downward trend of the scatter points in Figure 13-5 shows that there is a generally strong negative relationship between growth in the economy and the rate of unemployment. Years of high growth in real GDP were also years in which the unemployment rate fell, and years of low or negative growth in real GDP were years in which the unemployment rate rose.

The green vertical line in Figure 13-5 at the value of 3.19% indicates the average growth rate of real GDP over the period from 1949 to 2012. Points lying to the right of the vertical line are years of above-average growth. In these years, the value on the vertical axis is usually negative, meaning that the unemployment rate fell. That is, years of above-average growth were usually years in which the unemployment rate was falling. Conversely, points lying to the left of the vertical line were years of below-average growth. In these years, the value on the purple vertical line is usually positive, meaning that the unemployment rate rose. That is, years of below-average growth were usually years in which the unemployment rate was rising.

A period in which GDP is growing at a below-average rate and unemployment is rising is called a jobless recovery or a “growth recession.” Since 1990, there have been three recessions, in 1990–1991, 2001, and 2007–2009, all of which have been followed by jobless recoveries.

But true recessions, periods when real GDP falls, are especially painful for workers. As illustrated by the points to the left of the purple vertical line in Figure 13-5 (representing years in which the real GDP growth rate is negative), falling real GDP is always associated with a rising rate of unemployment, causing a great deal of hardship to families.

FAILURE TO LAUNCH

Matthew Benoit/Shutterstock

In March 2010, when the U.S. job situation was near its worst, the Harvard Law Record published a brief note titled “Unemployed law student will work for $160K plus benefits.” In a self-mocking tone, the author admitted to having graduated from Harvard Law School the previous year but not landing a job offer. “What mark on our résumé is so bad that it outweighs the crimson H?” the note asked.

The answer, of course, is that it wasn’t about the résumé—it was about the economy. Times of high unemployment are especially hard on new graduates, who often find it hard to get any kind of full-time job.

How bad was it in March 2010, around the time that note was written? Researchers at the San Francisco Fed analyzed the employment experience of college graduates, ages 21–23, and their findings are in Figure 13-6.

Sources: Federal Reserve Bank of San Francisco, 2010; Bureau of Labor Statistics.

Although the overall unemployment rate for college graduates 25 and older, even at its peak, was only about 5%, unemployment among recent graduates aged 21–23 peaked in 2010 at 10.7%. And many of those who were employed had been able to get only part-time jobs. In December 2007, at the beginning of the 2007–2009 recession, 83% of college graduates under the age of 24 who weren’t still in school were employed full time. By December 2009, that number was down to just 72%. Quite simply, many college graduates were having a hard time getting their working lives started.

The situation is improving, but slowly: by the end of 2010, 74% of recent graduates had full-time jobs and by the end of 2012 this figure was up to 81%. The rest were either unemployed or employed part time. However, even for those college graduates with jobs, 40% had landed jobs that required no college degree in 2012, up from 30% before the recession began in 2007. The U.S. labor market has a long way to go before being able to offer college graduates—and young people in general—the kinds of opportunities they deserve.

Module 13 Review

Check Your Understanding

1. Question

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Use the information for a hypothetical economy presented in the following table to answer questions 2, 3, and 4.

2. Question

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3. Question

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4. Question

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5. Question

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What is the labor market classification for each of the following individuals? Be as specific as possible, and explain your answer.