It is understandable if the average citizen is confused by the latest data about jobs in Minnesota. From August to September, the number of people with nonfarm jobs dropped by some 12,000. But while the number of jobs dropped, so did the unemployment rate, with the seasonally adjusted rate falling from 8 percent to 7.3 percent, an unusually sharp month-to-month change.
So what is going on? Is the jobs situation getting worse, with fewer people actually having jobs? Or is it getting better, with a smaller proportion of people out of work? To give a mealy-mouthed economist’s response, you cannot really tell with the information available. But this is a perfect moment for explaining some commonly used but poorly understood statistics.
The availability of jobs to people wanting work is one of the most important measures of how well an economy is doing. But it is not easy to measure, and there is no single indicator that captures all the important information. Federal and state governments put much effort into tabulating a series of indicators that, if properly understood, contains a wealth of information about labor markets. But these necessarily have quirks that can trip up anyone who doesn’t understand important details.
One must start by understanding the terms “labor force” “employed” and “unemployed.” Take the entire U.S. population. From that, subtract everyone under age 16. Then, subtract everyone in active military service. Also subtract everyone confined to prisons or other institutions.
This is the noninstitutionalized civilian population, 16 and over. It is divided into two groups, those “out of the labor force” and those “in the labor force.”
You are “out of the labor force” if you don’t have a job and are not trying to get one. Most people are in this category for age-related reasons. At the lower end, it includes high school or post-secondary students who don’t also work. At the upper end, it includes millions of retirees.
It also includes women who are interrupting their work lives to bear children, men or women staying at home full time to raise children and people whose disabilities make them unable to work. It also includes anyone in the prime of life with sufficient wealth or income that they don’t have to work.
The labor force further is broken down into two categories, “employed” and “unemployed.”
If you are employed by someone, even for only a few hours a week, or you have your own business, you are “in the labor force,” and you are “employed.” To be “unemployed,” you must lack a job and yet be actively seeking work. There are a number of specified actions that qualify as seeking work, including filling out job applications, sending out resumes, inquiring with potential employers, consulting government or private job banks and so forth.
But if you don’t have a job and are not doing any of these specified job-seeking activities, you are not “unemployed”; you are “out of the labor force.” It doesn’t matter if you just were laid off after years of employment or would readily take a job if offered. If you are not trying to get a job, then you are not unemployed.
Note that whether you are getting unemployment compensation is not mentioned. This is a common misunderstanding that the number of unemployed is tabulated from the unemployment compensation rolls and that as people come to the end of their unemployment eligibility, the government no longer deems them unemployed.
This is not true. There is no connection between getting unemployment benefits and one’s classification by the Bureau of Labor Statistics. For example, it is possible to be “unemployed” even if you were not laid off or even if you never held a job in your life. If a college student without any job graduates and starts sending out resumes, she would be counted as “unemployed,” even though she was never laid off and is ineligible for benefits.
Given this classification system, it is possible for the unemployment rate to drop even if the number of people with jobs also drops. If enough unemployed people decide to stop looking for jobs, and thus drop out of the labor force, the calculated unemployment rate will drop even as the number of jobs shrinks.
If unemployed people drop out of the labor force because they are well off and it seems like a good time to retire on their fat 401(k) accounts, society is not necessarily hurt. But if they instead are deemed “out of the labor force” because they perceive their job search is doomed, the official unemployment headcount and rate understate the harm to society.
Such people are termed “discouraged workers,” and, while they do not show up in the official unemployment rate, their numbers are tabulated by the Bureau of Labor statistics. The number of such discouraged workers is closely scrutinized at the BLS and by labor economists even if often ignored by the media and general public.
Such dropping out of the labor force by unemployed people is one explanation of how an unemployment rate could decline even as the number of jobs shrinks. The anomaly could also result from how labor indicators are tabulated from two distinct surveys. But that is the subject of another column.
© 2009 Edward Lotterman
Chanarambie Consulting, Inc.