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Introduction to Unemployment
Unemployment can be a terrible and wrenching life experience—like a serious automobile accident or a messy divorce—whose consequences only someone who has gone through it can fully understand. For unemployed individuals and their families, there is the day-to-day financial stress of not knowing from where the next paycheck is coming.
There are painful adjustments, like watching your savings account dwindle, selling a car and buying a cheaper one, or moving to a less expensive place to live. Even when the unemployed person finds a new job, it may pay less than the previous one. For many people, their job is an important part of their self worth. When unemployment separates people from the workforce, it can affect family relationships as well as mental and physical health.
The human costs of unemployment alone would justify making a low level of unemployment an important public policy priority. However, unemployment also includes economic costs to the broader society. When millions of unemployed but willing workers cannot find jobs, economic resource are unused. An economy with high unemployment is like a company operating with a functional but unused factory. The opportunity cost of unemployment is the output that the unemployed workers could have produced.
This chapter will discuss how economists define and compute the unemployment rate. It will examine the patterns of unemployment over time, for the U.S. economy as a whole, for different demographic groups in the U.S. economy, and for other countries. It will then consider an economic explanation for unemployment, and how it explains the patterns of unemployment and suggests public policies for reducing it.
How Economists Define and Compute Unemployment Rate
By the end of this section, you will be able to:
- Calculate the labor force participation rate and the unemployment rate
- Explain hidden unemployment and what it means to be in or out of the labor force
- Evaluate the collection and interpretation of unemployment data
Newspaper or television reports typically describe unemployment as a percentage or a rate. A recent report might have said, for example, from August 2009 to November 2009, the U.S. unemployment rate rose from 9.7% to 10.0%, but by June 2010, it had fallen to 9.5% . At a glance, the changes between the percentages may seem small. However, remember that the U.S. economy has about 160 million adults (as of the beginning of 2017) who either have jobs or are looking for them.
A rise or fall of just 0.1% in the unemployment rate of 160 million potential workers translates into 160,000 people, which is roughly the total population of a city like Syracuse, New York, Brownsville, Texas, or Pasadena, California. Large rises in the unemployment rate mean large numbers of job losses. In November 2009, at the peak of the recession, about 15 million people were out of work. Even with the unemployment rate now at 4.8% as of January 2017, about 7.6 million people who would like to have jobs are out of work.
Who’s In or Out of the Labor Force?
Should we count everyone without a job as unemployed? Of course not. For example, we should not count children as unemployed. Surely, we should not count the retired as unemployed. Many full-time college students have only a part-time job, or no job at all, but it seems inappropriate to count them as suffering the pains of unemployment. Some people are not working because they are rearing children, ill, on vacation, or on parental leave.
The point is that we do not just divide the adult population into employed and unemployed. A third group exists: people who do not have a job, and for some reason—retirement, looking after children, taking a voluntary break before a new job—are not interested in having a job, either. It also includes those who do want a job but have quit looking, often due to discouragement due to their inability to find suitable employment. Economists refer to this third group of those who are not working and not looking for work as out of the labor force or not in the labor force.
The U.S. unemployment rate, which is based on a monthly survey carried out by the U.S. Bureau of the Census, asks a series of questions to divide the adult population into employed, unemployed, or not in the labor force. To be classified as unemployed, a person must be without a job, currently available to work, and actively looking for work in the previous four weeks. Thus, a person who does not have a job but who is not currently available to work or has not actively looked for work in the last four weeks is counted as out of the labor force.
Employed : currently working for pay
Unemployed : Out of work and actively looking for a job
Out of the labor force : Out of paid work and not actively looking for a job
Labor force : the number of employed plus the unemployed
Calculating the Unemployment Rate
Figure 1 shows the three-way division of the 16-and-over population. In January 2017, about 62.9% of the adult population was in the labor force; that is, people are either employed or without a job but looking for work. We can divide those in the labor force into the employed and the unemployed. Table 1 shows those values. The unemployment rate is not the percentage of the total adult population without jobs, but rather the percentage of adults who are in the labor force but who do not have jobs:
Unemployment rate = (Unemployed people / Total labor force ) x 100
Figure 1 Employed, Unemployed, and Out of the Labor Force Distribution of Adult Population (age 16 and older), January 2017
The total adult, working-age population in January 2017 was 254.1 million. Out of this total population, 152.1 were classified as employed, and 7.6 million were classified as unemployed. The remaining 94.4 were classified as out of the labor force. As you will learn, however, this seemingly simple chart does not tell the
Table 1 U.S. Employment and Unemployment, January 2017
Total adult population over the age of 16
In the labor force
159.716 million (62.9%)
Out of the labor force
94.366 million (37.1%)
In this example, we can calculate the unemployment rate as 7.635 million unemployed people divided by 159.716 million people in the labor force, which works out to a 4.8% rate of unemployment. The followingWork It Out feature will walk you through the steps of this calculation.
Even with the out of the labor force category, there are still some people who are mislabeled in the categorization of employed, unemployed, or out of the labor force. There are some people who have only part time or temporary jobs, and they are looking for full time and permanent employment that are counted as employed, although they are not employed in the way they would like or need to be. Additionally, there are individuals who are underemployed.
This includes those who are trained or skilled for one type or level of work but are working in a lower paying job or one that does not utilize their skills. For example, we would consider an individual with a college degree in finance who is working as a sales clerk underemployed. They are, however, also counted in the employed group. All of these individuals fall under the umbrella of the term hidden unemployment. Discouraged workers, those who have stopped looking for employment and, hence, are no longer counted in the unemployed also fall into this group
Labor Force Participation Rate
Another important statistic is the labor force participation rate. This is the percentage of adults in an economy who are either employed or who are unemployed and looking for a job. Using the data in Figure 1 and Table 1, those included in this calculation would be the 159.716 million individuals in the labor force. We calculate the rate by taking the number of people in the labor force, that is, the number employed and the number unemployed, divided by the total adult population and multiplying by 100 to get the percentage.
For the data from January 2017, the labor force participation rate is 62.9%. Historically, the civilian labor force participation rate in the United States climbed beginning in the 1960s as women increasingly entered the workforce, and it peaked at just over 67% in late 1999 to early 2000. Since then, the labor force participation rate has steadily declined, slowly to about 66% in 2008, early in the Great Recession, and then more rapidly during and after that recession, reaching its present level, where it has remained stable, near the end of 2013.
The Establishment Payroll Survey
When the unemployment report comes out each month, the Bureau of Labor Statistics (BLS) also reports on the number of jobs created—which comes from the establishment payroll survey. The payroll survey is based on a survey of about 147,000 businesses and government agencies throughout the United States. It generates payroll employment estimates by the following criteria: all employees, average weekly hours worked, and average hourly, weekly, and overtime earnings. One of the criticisms of this survey is that it does not count the self-employed. It also does not make a distinction between new, minimum wage, part time or temporary jobs and full time jobs with decent pay.
How Does the U.S. Bureau of Labor Statistics Collect the U.S.
The unemployment rate announced by the U.S. Bureau of Labor Statistics on the first Friday of each month for the previous month is based on the Current Population Survey (CPS), which the Bureau has carried out every month since 1940. The Bureau takes great care to make this survey representative of the country as a whole. The country is first divided into 3,137 areas. The U.S. Bureau of the Census then selects 729 of these areas to survey. It divides the 729 areas into districts of about 300 households each, and divides each district into clusters of about four dwelling units. Every month, Census Bureau employees call about 15,000 of the four-household clusters, for a total of 60,000 households.
Employees interview households for four consecutive months, then rotate them out of the survey for eight months, and then interview them again for the same four months the following year, before leaving the sample permanently.
Based on this survey, state, industry, urban and rural areas, gender, age, race or ethnicity, and level of education statistics comprise components that contribute to unemployment rates. A wide variety of other information is available, too. For example, how long have people been unemployed? Did they become unemployed because they quit, or were laid off, or their employer went out of business? Is the unemployed person the only wage earner in the family? The Current Population Survey is a treasure trove of information about employment and unemployment.
If you are wondering what the difference is between the CPS and EPS, read the following Clear it Up feature.
What is the difference between CPS and EPS?
The United States Census Bureau conducts the Current Population Survey (CPS), which measures the percentage of the labor force that is unemployed. The Bureau of Labor Statistics' establishment payroll survey (EPS) is a payroll survey that measures the net change in jobs created for the month.
Criticisms of Measuring Unemployment
There are always complications in measuring the number of unemployed. For example, what about people who do not have jobs and would be available to work, but are discouraged by the lack of available jobs in their area and stopped looking? Such people, and their families, may be suffering the pains of unemployment. However, the survey counts them as out of the labor force because they are not actively looking for work. Other people may tell the Census Bureau that they are ready to work and looking for a job but, truly, they are not that eager to work and are not looking very hard at all.
They are counted as unemployed, although they might more accurately be classified as out of the labor force. Still other people may have a job, perhaps doing something like yard work, child care, or cleaning houses, but are not reporting the income earned to the tax authorities. They may report being unemployed, when they actually are working.
Although the unemployment rate gets most of the public and media attention, economic researchers at the Bureau of Labor Statistics publish a wide array of surveys and reports that try to measure these kinds of issues and to develop a more nuanced and complete view of the labor market. It is not exactly a hot news flash that economic statistics are imperfect. Even imperfect measures like the unemployment rate, however, can still be quite informative, when interpreted knowledgeably and sensibly.
Patterns of Unemployment
Let’s look at how unemployment rates have changed over time and how various groups of people are affected by unemployment differently.
The Historical U.S. Unemployment Rate
Figure 2 shows the historical pattern of U.S. unemployment since 1955.
Figure 2 The U.S. Unemployment Rate, 1955–2015 The U.S. unemployment rate moves up and down as the economy moves in and out of recessions. However, over time, the unemployment rate seems to return to a range of 4% to 6%. There does not seem to be a long-term trend toward the rate moving generally higher or generally lower.
As we look at this data, several patterns stand out:
Unemployment rates do fluctuate over time . During the deep recessions of the early 1980s and of 2007–2009, unemployment reached roughly 10%. For comparison, during the 1930s Great Depression, the unemployment rate reached almost 25% of the labor force.
Unemployment rates in the late 1990s and into the mid-2000s were rather low by historical standards . The unemployment rate was below 5% from 1997 to 2000, and near 5% during almost all of 2006–2007, and 5% or slightly less from September 2015 through January 2017 (the latest date for which data are available as of this writing). The previous time unemployment had been less than 5% for three consecutive years was three decades earlier, from 1968 to 1970.
The unemployment rate never falls all the way to zero . It almost never seems to get below 3%—and it stays that low only for very short periods. (We discuss reasons why this is the case later in this chapter.)
The timing of rises and falls in unemployment matches fairly well with the timing of upswings and downswings in the overall economy, except that unemployment tends to lag changes in economic activity, and especially so during upswings of the economy following a recession. During periods of recession and depression, unemployment is high. During periods of economic growth, unemployment tends to be lower.
No significant upward or downward trend in unemployment rates is apparent . This point is especially worth noting because the U.S. population more than quadrupled from 76 million in 1900 to over 324 million by 2017. Moreover, a higher proportion of U.S. adults are now in the paid workforce, because women have entered the paid labor force in significant numbers in recent decades. Women comprised 18% of the paid workforce in 1900 and nearly half of the paid workforce in 2017. However, despite the increased number of workers, as well as other economic events like globalization and the continuous invention of new technologies, the economy has provided jobs without causing any long-term upward or downward trend in unemployment rates.
Unemployment Rates by Group
Unemployment is not distributed evenly across the U.S. population. Figure 3 shows unemployment rates broken down in various ways: by gender, age, and race/ethnicity.
Figure 3 Unemployment Rate by Demographic Group
(a) By gender, 1972–2016. Unemployment rates for men used to be lower than unemployment rates for women, but in recent decades, the two rates have been very close, often– and especially during and soon after the Great Recession – with the unemployment rate for men somewhat higher.
(b) By age, 1972–2016. Unemployment rates are highest for the very young and become lower with age.
(c) By race and ethnicity, 1972–2016. Although unemployment rates for all groups tend to rise and fall together, the unemployment rate for blacks is typically about twice as high as that for whites, while the unemployment rate for Hispanics is in between.
The unemployment rate for women had historically tended to be higher than the unemployment rate for men, perhaps reflecting the historical pattern that women were seen as secondary earners. By about 1980, however, the unemployment rate for women was essentially the same as that for men, as Figure 3 (a) shows. During the 2008-2009 recession and in the immediate aftermath, the unemployment rate for men exceeded the unemployment rate for women. Subsequently, however, the gap has narrowed.
Younger workers tend to have higher unemployment, while middle-aged workers tend to have lower nemployment, probably because the middle-aged workers feel the responsibility of needing to have a job more heavily. Younger workers move in and out of jobs more than middle-aged workers, as part of the process of matching of workers and jobs, and this contributes to their higher unemployment rates. In addition, middle-aged workers are more likely to feel the responsibility of needing to have a job more heavily. Elderly workers have extremely low rates of unemployment, because those who do not have jobs often exit the labor force by retiring, and thus are not counted in the unemployment statistics. Figure 3 (b) shows unemployment rates for women divided by age. The pattern for men is similar.
The unemployment rate for African-Americans is substantially higher than the rate for other racial or ethnic groups, a fact that surely reflects, to some extent, a pattern of discrimination that has constrained blacks’ labor market opportunities. However, the gaps between unemployment rates for whites and for blacks and Hispanics diminished in the 1990s, as Figure 3 (c) shows. In fact, unemployment rates for blacks and Hispanics were at the lowest levels for several decades in the mid-2000s before rising during the recent Great Recession.
Finally, those with less education typically suffer higher unemployment. In January 2017, for example, the unemployment rate for those with a college degree was 2.5%; for those with some college but not a four year degree, the unemployment rate was 3.8%; for high school graduates with no additional degree, the unemployment rate was 5.3%; and for those without a high school diploma, the unemployment rate was 7.7%. This pattern arises because additional education typically offers better connections to the labor market and higher demand. With less attractive labor market opportunities for low-skilled workers compared to the opportunities for the more highlyskilled, including lower pay, low-skilled workers may be less motivated to find jobs.
Breaking Down Unemployment in Other Ways
The Bureau of Labor Statistics also gives information about the reasons for unemployment, as well as the length of time individuals have been unemployed. Table 2 , for example, shows the four reasons for unemployment and the percentages of the currently unemployed that fall into each category. Table 3 shows the length of unemployment.
For both of these, the data is from January 2017.
Table 2 Reasons for Unemployment, January 2017
|Job Losers: Temporary||14.00%|
|Job Losers: Non Temporary||35.10%|
Table 3 Length of Unemployment, January 2017
|Length of Time||Percentage|
|Under 5 weeks||32.50%|
|5 to 14 weeks||27.50%|
|15 to 26 weeks||15.70%|
|Over 27 weeks||27.40%|
International Unemployment Comparisons
From an international perspective, the U.S. unemployment rate typically has looked a little better than average. Table 4 compares unemployment rates for 1991, 1996, 2001, 2006 (just before the recession), and 2012 (somewhat after the recession) from several other high-income countries.
Table 4 International Comparisons of Unemployment Rates
However, we need to treat cross-country comparisons of unemployment rates with care, because each country has slightly different definitions of unemployment, survey tools for measuring unemployment, and also different labor markets. For example, Japan’s unemployment rates appear quite low, but Japan’s economy has been mired in slow growth and recession since the late 1980s, and Japan’s unemployment rate probably paints too rosy a picture of its labor market.
In Japan, workers who lose their jobs are often quick to exit the labor force and not look for a new job, in which case they are not counted as unemployed. In addition, Japanese firms are often quite reluctant to fire workers, and so firms have substantial numbers of workers who are on reduced hours or officially employed, but doing very little. We can view this Japanese pattern as an unusual method for society to provide support for the unemployed, rather than a sign of a healthy economy.
Comparing unemployment rates in the United States and other high-income economies with unemployment rates in Latin America, Africa, Eastern Europe, and Asia is very difficult. One reason is that the statistical agencies in many poorer countries lack the resources and technical capabilities of the U.S. Bureau of the Census. However, a more difficult problem with international comparisons is that in many low-income countries, most workers are not involved in the labor market through an employer who pays them regularly.
Instead, workers in these countries are engaged in short-term work, subsistence activities, and barter. Moreover, the effect of unemployment is very different in high-income and low-income countries. Unemployed workers in the developed economies have access to various government programs like unemployment insurance, welfare, and food stamps. Such programs may barely exist in poorer countries. Although unemployment is a serious problem in many low-income countries, it manifests itself in a different way than in high-income countries.