Making Sense of Unemployment
Data (reading)
Making Sense of Unemployment Data
Scott A. Wolla, Ph.D., Senior Economic Education Specialist
Job growth has been healthy for five years. However, many people still express concern over
the health of the overall labor market. For example, Jim Clifton, CEO of Gallup, states that
the “official unemployment rate, as reported by the U.S. Department of Labor, is extremely
misleading.” He proposes the Gallup Good Jobs rate as a better indicator of the health of the
labor market. At the heart of Clifton and others’ concern is what the official unemployment
rate actually measures and whether it is a reliable indicator.
The Labor Force: Are You In or Out?
To measure the unemployment rate, the U.S. Bureau of Labor Statistics (BLS) surveys 60,000
households—about 110,000 individuals—which serve as a representative sample of the U.S.
population. Survey respondents (16 years of age and older) answer a series of questions that
classify them as either “in the labor force” or “not in the labor force.” Workers classified
as in the labor force are those who are either employed or unemployed (Figure 1).
The employed are those 16 years of age and older who have a job. Those considered
employed might include the underemployed — people who work part-time but want a fulltime job and those who are overqualified for the job they have and earn less pay than they
would at a job consistent with their education and experience. The labor force also includes
those who are unemployed—those who don’t have a job but have looked for work in the past
four weeks. As of December 2015, there were 157,833,000 people in the labor force.
Those classified as not in the labor force are not working and not looking for work. So, they
are not employed and also not considered unemployed. For example, many full-time college
students choose not to work so they can focus on their studies. Some parents choose to stay
home to care for their young children. And many older adults retire because they saved and
have enough financial resources and no longer have to work.
In each case, these people have excluded themselves from the labor force because they do not
wish to be employed. Even though they do not have jobs, they are not considered
unemployed. Another group classified as not in the labor force is discouraged workers. These
are people who do not have a job and are no longer looking for work because they think
there are no jobs available to them. Such discouragement is likely to occur during
a recession as people lose jobs and then have difficulty finding another one. They likely will
not start looking for work until they see signs that the labor market has improved. Because
they are neither employed nor actively seeking employment, they are not counted as part of
the labor force.
To calculate the unemployment rate, the BLS divides the number of people who are
unemployed by the total number of people in the labor force (and then multiplies by 100).
For example, an unemployment rate of 5 percent indicates that 95 percent of those in the
labor force are employed.
Economists classify unemployment into three categories: frictional, structural, and
cyclical. Frictional unemploy- ment results when people are temporarily unemployed, either
because they are new to the job market or are searching for a better job. Structural
unemployment is caused by a mismatch in the skills held by those looking for work and the
skills demanded by those seeking workers.
For example, when an auto assembly plant is moved to another city, the skills held by the
plant’s former workers may no longer be in demand in the workers’ current location. They
may have to relocate to cities with auto assembly plants or learn new job skills. Because
workers are always entering the labor force and switching jobs, a certain amount of frictional
unemployment is inevitable. Likewise, changes in technology and pref- erences guarantee
that economies also suffer from structural unemployment. As such, a certain amount of
unemployment is considered natural. Fittingly, the natural rate of unemployment is the sum
of frictional and struc- tural unemployment. Cyclical unemployment is associated with jobs
lost due to recession; it is the deviation from the natural rate of unemployment.
What Is the Unemployment Benchmark?
A “benchmark” provides a standard or point of reference to help judge the level of similar
things. For example, is a baseball player with a .125 batting average a good hitter? In 2015,
the batting average for professional Major League Baseball players was .254.4 So, professional
players who batted above that .254 benchmark in 2015 were above-average hitters. Because
the natural rate of unemployment defines “full employment,” it is often used as an
unemployment benchmark.
The current estimate of the natural rate of unemployment is about 5 percent, and the current
unemployment rate (using the U-3 measure; see the boxed insert) is also 5 percent (Figure 2).
Based on these two measures, many economists suggest that labor markets are now fairly
healthy. Federal Reserve Bank of St. Louis President James Bullard recently commented that
“U.S. labor markets have largely normalized.”
Filling in the Details with Other Data
Thinking again about baseball, in assessing a baseball player, team managers likely consider
statistics beyond batting average alone. For example, considering the on- base percentage and
slugging percentage in addition to batting average might provide a more complete assessment
of a player’s batting skills. Likewise, there are other useful indicators of the health of the
labor market. The labor force participation rate measures the labor force as a percentage of
the civilian non-institutional popula- tion. Labor force participation rose from 58.1 percent
in 1954 to a high of 67.3 percent in 2000 and then started a downward trend (Figure 3).
The labor force participation rate as of December 2015 was 62.6 percent. Economists explain
that the increase and more recent decrease in the labor force participation rate are largely
due to demographic changes. They attribute the increase in the labor force participation rate
from 1948 to 2000 largely to two historic shifts: women entering the labor force and the baby
boom generation (those born between 1946 and 1964) maturing and entering the labor force.
They attribute the recent decline to demographics again: Baby boomers (currently between
52 and 70 years old) leaving the labor force for retirement have reduced the labor force
participation rate for both men and women.
Economists disagree, however, about how much of the change in labor force participation is
due to demographics alone and how much is due to cyclical (business cycle) factors.
Economists who use a more cyclical explanation perceive the decrease in the labor force
participation rate as a “bad omen” for the broader economy. These economists argue that the
relatively low labor force participa- tion rate indicates that the economy is weaker than the
(U-3) unemployment rate alone might indicate. For example, having a large number of
discouraged workers (who are not counted as part of the labor force) would cause the labor
force participation rate to fall and keep the unemployment rate lower than it would
otherwise be.
Other economists find the decrease in the labor force participation rate fairly predictable
based on demographics and cyclical factors to be relatively small.
James Bullard is among those who think demographics have driven most of the recent
decline in labor force par- ticipation. As such, he argues that most of the decline in the
unemployment rate can be understood as an improving labor market rather than workers
dropping out of the labor force because they can’t find jobs.9
Conclusion
The standard unemployment rate (U-3) is an important measure of the health of national
labor market condi- tions. Recent unemployment data indicate that the U.S. economy is near
full employment. However, many observers doubt that the unemployment rate fully reflects
the reality of underemployed and discouraged workers—both of whom are not counted as
unemployed. They often refer to the downward trend in the labor mar- ket participation rate
as an indication of labor market weakness. However, taken in the context of the demographic shift, the current low unemployment rate is likely an indication of a strong labor
market.
Notes
1 BLS All Employees: Total Nonfarm Payrolls [PAYEMS]. FRED® (Federal Reserve Economic Data), Federal
Reserve Bank of St. Louis; https://research.stlouisfed.org/fred2/series/PAYEMS/.
2 Clifton, Jim. “The Big Lie: 5.6% Unemployment.” Gallup. February 3, 2015;
http://www.gallup.com/opinion/chairman/181469/big-lie-unemployment.aspx.
3 BLS Labor Force Statistics from the Current Population Survey;
http://www.bls.gov/web/empsit/cpseea01.htm.
4 Baseball-reference.com. “League Year-By-Year Batting—Averages.” Accessed December 15, 2015;
http://www.baseball-reference.com/leagues/MLB/bat.shtml.
5 U.S. Congressional Budget Office Natural Rate of Unemployment (Long-Term) [NROU]. FRED®, Federal
Reserve Economic Data, Federal Reserve Bank of St. Louis; https://research.stlouisfed.org/fred2/series/NROU/.
6 Federal Reserve Bank of St. Louis. “St. Louis Fed’s Bullard Discusses Five Questions on U.S. Monetary Policy.”
November 11, 2015; https://www.stlouisfed.org/news-releases/2015/11/06/st-louis-feds-bullard-dis- cusses-fivequestions-on-us-monetary-policy. Federal Reserve Bank of St. Louis | research.stlouisfed.org 5
7 The BLS defines the civilian noninstitutional population as “people 16 years of age and older residing in the 50
states and District of Columbia, who are not inmates of institutions (e.g., penal and mental facilities, homes for
the aged) and who are not on active duty in the Armed Forces.” BLS “Frequently Asked Questions”;
http://www.bls.gov/dolfaq/bls_ques23.htm.
8 For an overview of the “bad omen” and other views, see Bullard, James. “The Rise and Fall of Labor Force
Participation in the United States.” Federal Reserve Bank of St. Louis Review, First Quarter 2014, 96(1), pp. 112; https://research.stlouisfed.org/publications/review/2014/q1/bullard.pdf.
9 Bullard, James. “The Rise and Fall of Labor Force Participation in the U.S.” Presented to the Exchequer Club,
Washington, DC, February 19,
2014; https://www.stlouisfed.org/~/media/Files/PDFs/Bullard/remarks/Bullard_Excheq
uerClub_19Feb2014_final.pdf.
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