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2.3 Measuring Joblessness: The Unemployment Rate

One aspect of economic performance is how well an economy uses its resources. Because an economy’s workers are its chief resource, keeping workers employed is a paramount concern of economic policymakers. The unemployment rate is the statistic that measures the percentage of those people wanting to work who do not have jobs. Every month, the U.S. Bureau of Labor Statistics computes the unemployment rate and many other statistics that economists and policymakers use to monitor developments in the labor market.

The Household Survey

The unemployment rate comes from a survey of about 60,000 households called the Current Population Survey. Based on the responses to survey questions, each adult (age 16 and older) in each household is placed into one of three categories:

Employed. This category includes those who at the time of the survey worked as paid employees, worked in their own business, or worked as unpaid workers in a family member’s business. It also includes those who were not working but who had jobs from which they were temporarily absent because of, for example, vacation, illness, or bad weather.
Unemployed. This category includes those who were not employed, were available for work, and had tried to find employment during the previous four weeks. It also includes those waiting to be recalled to a job from which they had been laid off.
Not in the labor force. This category includes those who fit neither of the first two categories, such as a full-time student, homemaker, or retiree.

Notice that a person who wants a job but has given up looking—a discouraged worker—is counted as not being in the labor force.

The labor force is the sum of the employed and unemployed, and the unemployment rate is the percentage of the labor force that is unemployed. That is,

Labor Force = Number of Employed + Number of Unemployed

and

A related statistic is the labor-force participation rate, the percentage of the adult population that is in the labor force:

The Bureau of Labor Statistics computes these statistics for the overall population and for groups within the population: men and women, whites and blacks, teenagers and prime-age workers.

Figure 2-4 shows the breakdown of the population into the three categories for April 2014. The statistics broke down as follows:

Labor Force = 145.7 + 9.7 = 155.4 million.

Unemployment Rate = (9.7/155.4) × 100 = 6.2%.

Labor-Force Participation Rate = (155.4/247.4) × 100 = 62.8%.

Figure 2.5: FIGURE 2-4: The Three Groups of the Population When the Bureau of Labor Statistics surveys the population, it places all adults into one of three categories: employed, unemployed, or not in the labor force. This figure shows the number of people in each category in April 2014.

Data from: U.S. Department of Labor.

Hence, almost two-thirds of the adult population was in the labor force and about 6.2 percent of those in the labor force did not have a job.

CASE STUDY

Men, Women, and Labor-Force Participation

The data on the labor market collected by the Bureau of Labor Statistics reflect not only economic developments, such as the booms and busts of the business cycle, but also a variety of social changes. Longer-term social changes in the roles of men and women in society, for example, are evident in the data on labor-force participation.

Figure 2-5 shows the labor-force participation rates of men and women in the United States from 1950 to 2013. Just after World War II, men and women had very different economic roles. Only 34 percent of women were working or looking for work, in contrast to 86 percent of men. Since then, the difference between the participation rates of men and women has gradually diminished, as growing numbers of women have entered the labor force and some men have left it. Data for 2013 show that more than 57 percent of women were in the labor force, in contrast to 70 percent of men. As measured by labor-force participation, men and women are now playing more equal roles in the economy.

Figure 2.6: FIGURE 2-5: Labor-Force Participation Over the past several decades, the labor-force -participation rate for women has risen, while the rate for men has declined.

Data from: U.S. Department of Labor.

There are many reasons for this change. In part, it is due to new technologies, such as the washing machine, clothes dryer, refrigerator, freezer, and dishwasher, which have reduced the amount of time required to complete routine household tasks. In part, it is due to improved birth control, which has reduced the number of children born to the typical family. And in part, this change in women’s role is due to changing political and social attitudes. Together, these developments have had a profound impact, as demonstrated by these data.

Although the increase in women’s labor-force participation is easily explained, the fall in men’s participation may seem puzzling. There are several developments at work. First, young men now stay in school longer than their fathers and grandfathers did. Second, older men now retire earlier and live longer. Third, with more women employed, more fathers now stay at home to raise their children. Full-time students, retirees, and stay-at-home fathers are all counted as out of the labor force.

Figure 2-5 shows that, in the most recent decade, the labor-force participation rate declined for both men and women. This phenomenon is examined in a case study in Chapter 7. We will see that this recent decline is due in part to the start of retirement for the large baby-boom generation and in part to the weak economy in the aftermath of the financial crisis of 2008–2009.

The Establishment Survey

When the Bureau of Labor Statistics (BLS) reports the unemployment rate every month, it also reports a variety of other statistics describing conditions in the labor market. Some of these statistics, such as the labor-force participation rate, are derived from the Current Population Survey. Other statistics come from a separate survey of about 160,000 business establishments that employ over 40 million workers. When you read a headline that says the economy created a certain number of jobs last month, that statistic is the change in the number of workers that businesses report having on their payrolls.

Because the BLS conducts two surveys of labor-market conditions, it produces two measures of total employment. From the household survey, it obtains an estimate of the number of people who say they are working. From the establishment survey, it obtains an estimate of the number of workers firms have on their payrolls.

One might expect these two measures of employment to be identical, but that is not the case. Although they are positively correlated, the two measures can diverge, especially over short periods of time. An example of a large divergence occurred in the early 2000s, as the economy recovered from the recession of 2001. From November 2001 to August 2003, the establishment survey showed a decline in employment of 1.0 million, while the household survey showed an increase of 1.4 million. Some commentators said the economy was experiencing a “jobless recovery,” but this description applied only to the establishment data, not to the household data.

Why might these two measures of employment diverge? Part of the explanation is that the surveys measure different things. For example, a person who runs his or her own business is self-employed. The household survey counts that person as working, whereas the establishment survey does not because that person does not show up on any firm’s payroll. As another example, a person who holds two jobs is counted as one employed person in the household survey but is counted twice in the establishment survey because that person would show up on the payrolls of two firms.

Another part of the explanation for the divergence is that surveys are imperfect. For example, when new firms start up, it may take some time before those firms are included in the establishment survey. The BLS tries to estimate employment at start-ups, but the model it uses to produce these estimates is one possible source of error. A different problem arises from how the household survey extrapolates employment among the surveyed households to the entire population. If the BLS uses incorrect estimates of the size of the population, these errors will be reflected in its estimates of household employment. One possible source of incorrect population estimates is changes in the rate of immigration, both legal and illegal.

In the end, the divergence between the household and establishment surveys from 2001 to 2003 remains a mystery. Some economists believe that the establishment survey is the more accurate one because it has a larger sample. Yet one study suggests that the best measure of employment is an average of the two surveys.6

More important than the specifics of these surveys or this particular episode when they diverged is the broader lesson: all economic statistics are imperfect. Although they contain valuable information about what is happening in the economy, each one should be interpreted with a healthy dose of caution and a bit of skepticism.