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Friday, January 04, 2019

How can the unemployment rate increase if the economy is adding so many jobs?

by Calculated Risk on 1/04/2019 01:57:00 PM

FAQ: How can the unemployment rate rise if the economy is adding so many jobs?

The BLS reported this morning that the economy added 312,000 jobs, but the unemployment rate increased to 3.9% from 3.7% in November.

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 634,000 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 employees in agriculture, private households, and the self-employed.
emphasis added
And the CPS:
Employed people are those who worked as paid employees; were self employed in their own business, profession, or farm; worked without pay for at least 15 hours in a family business or farm; or were temporarily absent from their jobs.

The household survey - employment measure includes categories of workers that are not covered by the payroll survey:
the self-employed
workers in private households
agricultural workers
unpaid workers in family businesses
workers on leave without pay during the reference period

Unemployed people are those who had no employment (as defined above) during the reference week; were available for work at that time; and had made specific efforts to find employment in the prior 4 weeks. People laid off from a job and expecting to be recalled are included among the unemployed but unlike the other unemployed, they need not have been looking for employment.
So in December, the headline CES number showed a gain of 312,000 non-farm private jobs (by the definitions above). The CPS showed an increase of 142,000 employed people.

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

But the unemployment rate increased, even though the CPS showed an increase in employed people. How can that be?

The CPS also showed an increase in the Civilian Labor Force Level by 419,000. And an increase in the number of unemployed people (U-3) of 276,000.

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 numbers increased the unemployment rate to 3.9% (rounded).

Here are the numbers (000s):

Civilian Labor Force162,821163,240419
Unemployment Rate3.70%3.86%0.16%

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

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 (added jobs and increasing unemployment rate), but over time the numbers will work out.