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PAGE ONE Economics
®
Making Sense of Unemployment
Data
Scott A. Wolla, Ph.D., Senior Economic Education Specialist
GLOSSARY
Cyclical unemployment: Unemployment
associated with recessions in the business
cycle.
Discouraged worker: Someone who is not
working and is not looking for work
because of a belief that there are no jobs
available to him or her.
Employed: People 16 years and older who
have jobs.
Frictional unemployment: Unemployment
that results when people are new to the
job market, including recent graduates, or
are transitioning from one job to another.
Labor force: The total number of workers,
including both the employed and the
unemployed.
Labor force participation rate: The percentage of the working-age population that
is in the labor force.
Natural rate of unemployment: The rate of
unemployment that does not contain
cyclical unemployment.
Recession: A period of declining real income
and rising unemployment; significant
decline in general economic activity
extending over a period of time.
Structural unemployment: Long-term
joblessness caused by a mismatch in the
skills held by those looking for work and
the skills demanded by those seeking
workers.
Underemployed: Wanting a full-time job
but having only a part-time job; being
overqualified for a job and receiving less
pay than would be earned at a job requiring a higher skill level.
Unemployed: People at least 16 years old
who are without jobs and actively seeking
work.
February 2016
“Unemployment is like a headache or a high temperature—unpleasant and
exhausting but not carrying in itself any explanation of its cause.”
—William Henry Beveridge, Causes and Cures of Unemployment
Job growth has been healthy for five years.1 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.”2 He
proposes the Gallop 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 full-time 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.3
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
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Figure 1
2
Figure 2
U.S. Employment Status, December 2015
Out of the Labor Force
In the Labor Force, Employed
In the Labor Force, Unemployed
NOTE: The BLS defines the labor force as persons 16 years of age and older
either employed or unemployed and seeking work. BLS “Frequently Asked
Questions”; http://www.bls.gov/dolfaq/bls_ques23.htm.
SOURCE: BLS Labor Force Statistics from the Current Population Survey;
http://www.bls.gov/web/empsit/cpseea01.htm.
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 unemployment 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
NOTE: In December 2015, the unemployment rate (blue line) was 5 percent. The 2015:Q4 estimated natural rate of unemployment (red line) was
5.05 percent. Gray bars indicate recessions as determined by the National
Bureau of Economic Research (NBER).
SOURCE: BLS Civilian Unemployment Rate [UNRATE] and U.S. Congressional
Budget Office Natural Rate of Unemployment (Long-Term) [NROU].
Retrieved from FRED® (Federal Reserve Economic Data), Federal Reserve
Bank of St. Louis, January 8, 2016;
https://research.stlouisfed.org/fred2/graph/?g=34VS.
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 preferences 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 structural 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
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3
Alternative Measures of Labor Utilization
The BLS calculates six measures of unemployment to provide additional information on the health of the labor market. The official unemployment rate is the U-3 measure. Some people argue that U-3 alone does not fully communicate the health of the labor market, so the BLS
has developed several alternative measures of labor market conditions and publishes them every month. Comparing the U-6 rate with the
U-3 rate can provide another piece of valuable data (Figure 4). The U-6 unemployment rate includes the unemployed (as does the U-3 measure), but also includes those marginally attached (which include discouraged workers), plus those working part-time for economic reasons
(and considered underemployed). The December 2015 U-6 rate was 9.9 percent, while the U-3 rate was 5.0 percent.
BLS
Unemployment
Measure
Description
December
2015 (%)
U-1
Persons unemployed 15 weeks or longer, as a percent of the civilian labor force
2.1
U-2
Job losers and persons who completed temporary jobs, as a percent of the civilian labor force
2.4
U-3
Total unemployed, as a percent of the civilian labor force (official unemployment rate)
5.0
U-4
Total unemployed plus discouraged workers, as a percent of the civilian labor force plus
discouraged workers
5.4
U-5
Total unemployed, plus discouraged workers, plus all other persons marginally attached to
the labor force, as a percent of the civilian labor force plus all persons marginally attached
to the labor force
6.1
U-6
Total unemployed, plus all persons marginally attached to the labor force, plus total employed
part-time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force
9.9
SOURCE: BLS. “Household Data: Table A-15. Alternative Measures of Labor Underutilization.” Last modified date: December 4, 2015;
http://www.bls.gov/news.release/empsit.t15.htm.
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,5
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.”6
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 onbase 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 noninstitutional population.7 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
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Figure 3
Figure 4
!" #$
4
NOTE: The labor force participation rate rose from 58.1 percent in 1954 to
a high of 67.3 percent in 2000 and then started a downward trend. In
December 2015 it was 62.6 percent. Gray bars indicate recessions as determined by the National Bureau of Economic Research (NBER).
SOURCE: BLS Civilian Labor Force Participation Rate [CIVPART]. Retrieved
from FRED®(Federal Reserve Economic Data), Federal Reserve Bank of
St. Louis, Federal Reserve Bank of St. Louis, January 8, 2016;
https://research.stlouisfed.org/fred2/graph/?g=34VV.
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.8 These economists argue that the relatively low labor force participation 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.
NOTE: In December 2015, the U-3 unemployment rate (red line) was 5.0
percent. It peaked at 10 percent after the Great Recession. In December
2015, the U-6 unemployment rate (blue line) was 9.9 percent. It peaked at
17.1 percent after the Great Recession. Gray bars indicate recessions as
determined by the National Bureau of Economic Research (NBER).
SOURCE: BLS Total Unemployed, Plus All Marginally Attached Workers
Plus Total Employed Part Time for Economic Reasons [U6RATE] and BLS
Civilian Unemployment Rate [UNRATE]. Retrieved from FRED® (Federal
Reserve Economic Data), Federal Reserve Bank of St. Louis, January 8, 2016;
https://research.stlouisfed.org/fred2/graph/?g=34GF.
James Bullard is among those who think demographics
have driven most of the recent decline in labor force participation. 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 conditions. 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 market 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. n
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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/.
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. 1-12;
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.
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-discusses-five-questions-on-us-monetary-policy.
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