We Are Looking at the Unemployment Rate Incorrectly Part I: An Introduction
**This is the first part of a multi-part series examining issues with the unemployment rate. Links to the subsequent parts will be added to this post as they are published.**
Each month, the Bureau of Labor Statistics (BLS) surveys 60,000 households (roughly 110,000 individuals) to understand their employment status. Data from this survey is extrapolated to calculate the metrics reported in the monthly BLS jobs report.
The most widely covered metric from this report is the unemployment rate. The unemployment rate is my uncontested favorite economic metric for a few reasons:
- The unemployment rate is the economic metric with the most easily understood impact on our lives. We can relate our own status (employed or unemployed) to the overall rate in the country. The impact of being unemployed requires no explanation.
- The unemployment rate has so many moving parts. An increase in jobs does not necessarily decrease the unemployment rate, as a decrease in overall jobs does not necessarily increase the unemployment rate.
- The unemployment rate is the ultimate confirmation bias statistic. A change in this one metric can be used to validate conflicting messages.
How is the unemployment rate calculated?
Before critiquing the unemployment rate, is important to understand each input into the measure. A few definitions from the BLS that are important to clarify:
- Population: Civilian non-institutional population is defined as persons 16+ years of age residing in the 50 states or D.C., 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.
- Employed: Individuals who did any work for pay or profit. Includes full-time and part-time employees, individuals who did at least 15 hours of unpaid work in a family-operated enterprise; and individuals who were temporarily absent from their regular jobs because of illness, vacation, bad weather, industrial dispute, or various personal reasons.
- Unemployed: Individuals who do not have a job, have actively looked for work in the prior 4 weeks, and are currently available for work. Persons who were not working and were waiting to be recalled to a job from which they had been temporarily laid off are also included as unemployed. Receiving unemployment benefits has no bearing on whether a person is classified as unemployed.
The unemployment rate is measured as:
The BLS also measures the level in which the labor force is engaged in the job market. This rate is known as the labor force participation rate and is calculated as:
What makes the unemployment rate change?
Changes in the unemployment rate are difficult to understand. Rate changes can occur because the rate can change for two fundamental reasons
- The number of jobs in the country increased/decreased
- The labor force increased/decreased in size
The labor force can change due to:
- The population increasing, thus increasing the number of individuals looking for work
- Individuals stop looking for work, thus exiting the labor force
Those without jobs can stop looking for work for any number of reasons. One could leave the labor force because they have the means to retire; they could also leave the labor force because they feel there is no job available to them. The November 2016 jobs report was a fascinating report. The report stated:
- U.S. employers added 178,000 jobs in November
- Unemployment rate fell from 4.9% to 4.6%
- The Labor Force Participation Rate decreased from 62.8% to 62.7%
It is difficult to understand these three numbers in isolation. If jobs increased and the labor force decreased, which is more responsible for the drop in unemployment rate?