Interpreting the Employment Situation
Sometimes headlines will describe the unemployment rate as decreasing but very few jobs were added or created in the same month. How can this be? Well, the conundrum economists are faced with, the definition of a workforce, contributes to complicating figures.
The Bureau of Labor Statistics defines the Civilian Labor Force as: "The civilian labor force is the sum of employed and unemployed persons."
Who makes up the employed and unemployed? The BLS states "each person 16 years and over in a sample household is classified as employed, unemployed, or not in the labor force." So, anyone at home over the age of 16 is part of household data. As you can imagine, including groups such as high school / college students and others exhibiting seasonal working abilities may cause some fluctuations in the calculation of employment rates. Hence, the need for seasonal adjustments.
However, this doesn't explain why the employment rate goes down while the number of employed people drops. Here is why these discrepencies can (and sometimes do) exist.
In a nut shell, the civilian workforce = employed + unemployed
Since people not classified as either employed or unemployed are considered ' not in the labor force' and the unemployment rate = unemployed/civilian workforce, this leaves the possibility that the numerator (unemployed) can decrease by people being reclassified as 'not in labor force', while the denominator (employed + unemployed) is reduced improportionately. Here is an example using 100 as the civilian Labor Force:
Month 1 Civilian Labor Force (CLF): 95 employed + 5 unemployed = 100
Month 1 Unemployment Rate: 5/100 = 5%
In the following month, 3 unemployed people became frustrated and are no longer considered part of the CLF, but no jobs are added:
Month 2 Civilian Labor Force: 95 employed + 2 unemployed = 97
Month 2 Unemployment Rate: 2/97 = 2.06%
Taken at face value, one would assume the employment situation is in much better condition or booming and the economy is experiencing job growth. However, as shown above, this is not necessarily the case because no new jobs were added.
Long term periods of high unemployment rates will eventually begin to diminish as people are dropped from the CLF. This often leads to a false interpretation of a growing job market.
To better gauge the employment situation, take a look at the month to month changes in the Civilian Labor Force and compare those to the changes in the unemployment rate. This is usually described in the section of the Employment Situation Release titled 'Persons not in the Labor Force'
The definitions of 'employed', 'unemployed' and 'not in labor' force can be obtained here: Employment Situations Explanatory Note
Written by: Taith Rupp
No comments so far