Saturday, August 08, 2009

Jobs and the Unemployment Rate

by Bill McBride on 8/08/2009 07:10:00 PM

FAQ: How can the unemployment rate fall if the economy is losing net jobs, especially since the population is growing?

This data comes from two separate surveys. The unemployment Rate comes from the Current Population Survey (CPS: commonly called the household survey), a monthly survey of about 60,000 households.

The jobs number comes from Current Employment Statistics (CES: payroll survey), a sample of approximately 400,000 business establishments nationwide.

These are very different surveys: the CPS gives the total number of employed (and unemployed including the alternative measures), and the CES gives the total number of positions (excluding some categories like the self-employed, and a person working two jobs counts as two positions).

A couple of key concepts (from the BLS):

The CES employment series are estimates of nonfarm wage and salary jobs, not an estimate of employed persons; an individual with two jobs is counted twice by the payroll survey. The CES employment series excludes workers in agriculture and private households and the self-employed.
emphasis added
And the CPS:
The CPS estimate of employment is for the total number of employed persons. Included are categories of workers that are not covered by the Current Employment Statistics (CES) survey: self-employed persons, private household workers, agriculture workers, unpaid family workers, and workers on leave without pay during the reference period. Multiple jobholders are counted once in the estimate of total employed.

Unemployed persons include those who did not have a job during the reference week, had actively looked for work in the prior 4 weeks, and were available for work. Actively looking for work includes activities such as contacting a possible employer, contacting an employment agency or employment center, having a job interview, sending out resumes, filling out job applications, placing or answering job advertisements, and checking union or professional registers.
So in July, the headline CES number showed a loss of 247,000 non-farm private jobs (by the definitions above). The CPS showed a decline of 155,000 employed people.

These two surveys are almost always different, and both are useful.

But the unemployment rate fell, even though the CPS showed a decline in employed people. How can that be?

The CPS also showed a decline in the Civilian Labor Force Level by 422,000. And a decline in the number of unemployed people (U-3) of 267,000.

The unemployment rate is a ratio, with the numerator the number of unemployed, and the denominator the Civilian Labor Force - so these changes in both number lowered the unemployment rate to 9.4%.

If you want more details, see Monthly Employment Situation Report: Quick Guide to Methods and Measurement Issues

Although the CPS showed the labor force declined in July, over time the labor force will continue to grow - probably around 1.5 to 2.0 million people per year on average (once the economy starts to recover), and the CES will probably need to show the addition of around 125,000 jobs per month just to keep the unemployment rate steady (estimates vary of this number).

So remember, the jobs and unemployment rate come from two different surveys and are different measurements (one for positions, the other for people). Some months the numbers may not seem to make sense (lost jobs and falling unemployment rate), but over time the numbers will work out.

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