Economics seems to be ruled by a cosmic force. It is invisible and rarely detected, but sometimes when the wind is moving through the cedars at just the right velocity you can hear its voice reminding us that, “Nothing is simple.”
In the view of many people, for example, what could be simpler than unemployment? If you have a job, you’re employed; if you don’t, you’re unemployed. The cosmic force can take a hike.
Unfortunately, it’s not that simple. With some exceptions, the “employed” portion is generally fairly straightforward in terms of definition: Either you are or you aren’t. But once we actually start to collect the employment data the cosmic force takes over.
There are two separate sources for the number of people employed: households and establishments. Both of these sources are estimates based on statistical sample data from surveys, responses to questions posed to employers and to individuals.
As you might expect, despite the skilled efforts of the economists and statisticians at the Bureau of Labor Statistics to get precise data, the two surveys sometimes yield very different results. Over an extended period the differences become less significant, but in a given month the payroll (business) data and the household data can give wildly different views of the status and direction of the U.S. economy.
Once a year the statistics bureau is able to match up the employment and unemployment data to the updated numbers provided by the Census Bureau, and they retrofit and adjust their employment data as necessary. Retrospective adjustments, though, generally limit the usefulness of the data to analyzing and understanding longer-term trends. On a month-to-month basis we have to do the best we can with surveys and statistical samples.
Overall, the employment surveys do a very good job identifying the number of people working, those laid off and the number of new jobs established. Determining the number of unemployed and the unemployment rate is another matter, though, and it is here that the impact of the cosmic anti-simplicity force is felt.
In one sense, we could say accurately that if you are not working you are unemployed, and that would be true, but not useful. Even in a Stone Age society, for example, babies did not work and small children were not expected to make significant economic contributions. The labor force does not include everyone.
Modern societies are wealthier in material goods than preceding ages, so we have different expectations for our labor. As our U.S. economy developed, for example, women who had worked side by side with their husbands in the fields became household managers. Children, whose primary role had been to assist in agriculture’s endless tasks, gradually were expected instead to absorb increasing amounts of formal education. The wage-based job market has replaced agriculture, but these and similar shifts and economic changes continue to this day, directly affecting employment data.
We have to decide, then, the size of labor force: the number of people that, according to our social norms and habits, would be or could be wage earners. Expressed as a percentage of that total possible, this is known as the “labor force participation rate.” It is the key to calculating not just the unemployment rate itself but also the wealth of insights into the American economy, its structure, how we interact with it, and the changes and trends that will affect our future.
The reason why the labor force participation rate is so important is that you can’t be unemployed if you don’t want a job, but obviously this is a flexible situation. It is not unusual, for example, for a mother of small children to withdraw from the workforce, only to re-enter it when the children are older.
Faced with a statutory and professional need to measure unemployment the Labor Department needed to nail down a definition of unemployment that was technically accurate, measurable and stable enough to allow comparisons with earlier time periods. What it came up with years ago was this: A person is unemployed if he or she is not working, is able to work and has been actively seeking employment during the four weeks prior to the survey. It’s not perfect but it is consistent and allows month-to-month and year-to-year comparisons.
For a lot of people the single number, the unemployment rate, is the beginning and end of the story. But for those trying to figure out where our economy is headed, it isn’t that simple. That’s why the monthly “Employment Situation Summary” comes with 27 statistical tables attached.
Our economy is a very complex thing, more like a dynamic, living organism than we like to admit. It is not simple, no matter how hard we might wish it so.
James McCusker is a Bothell economist, educator and consultant. He also writes a monthly column for the Herald Business Journal.