The Bureau of Labor Statistics releases its “employment situation” summary (also known as the jobs report) at the start of each month, giving economic pundits and policymakers plenty to comment on for a few days. The numbers are often used to paint a rosy picture of the economy (Jobless rate hits decade low! Record numbers in the labor force!), as well as a gloomy one (Job growth loses steam! Record numbers not in the labor force!)
What are we to make of all the mixed messages? You may recall that on the campaign trail, Donald Trump told his supporters not to believe the “phony numbers” indicating that the unemployment rate was 4.9 and 5 percent, suggesting himself that the real rate was “as high as 35” and even “42 percent.” So, should we just ignore these official statistics entirely? Of course not, but it is important to understand which statistic is being cited, and why that matters.
There are many different measures out there to keep track of—the employment rate, the labor force participation rate, the unemployment rate—and each tells us something different about the health of the labor market and the position of various groups.
Who is in the labor force? Getting the definitions right.
First, we need to understand the broad population being studied. It’s typically the “civilian, noninstitutional population” above the age of 16. This population excludes those who are in penal and mental facilities, retirement homes, and those on active duty in the Armed Forces.
Next, within this civilian, noninstitutional population, one can be either in the labor force or not in the labor force. The labor force includes those who are employed and unemployed. So:
- People who are employed have jobs.
- Unemployed people are jobless, but they are available for work and have actively sought work in the past four weeks.
- People who are not in the labor force are neither employed nor unemployed. They may be retired, pursuing a college degree, caring for family, or they may have become discouraged with the job search and stopped looking for work entirely.
When considering the entire civilian noninstitutional population, a substantial portion of the population is not in the labor force (37 percent). But since going to school while young and or retiring when old are generally considered to be valid alternatives to working, many experts limit the pool to those ages 25 to 54, also known as “prime-age.” The fraction of prime-age adults not in the labor force is much lower than for the entire civilian non institutional population (19 percent).
What’s with all the different rates?
The three most commonly-cited labor force statistics are the employment-population ratio, the labor force participation rate, and the unemployment rate. How do they differ?
The employment-population ratio, also known as the employment rate or work rate, is the employed population divided by the whole civilian noninstitutional population. This rate is currently around 60 percent (79 percent for prime-age adults), about 4.5 percentage points lower than its pre-Recession high in 2000.
The labor force participation rate (or participation rate) is the number people in the labor force divided by the civilian noninstitutional population. Though it increased steadily up until the late 1990s, the labor force participation rate of prime-age adults has since fallen:
Finally, the unemployment rate is the unemployed population divided by those in the labor force. That is, it does not consider those who are not in the labor force.
The BLS also releases “alternative measures of labor underutilization.” None were ever close to 42 percent, but it is true that the official unemployment rate (the U-3) does not necessarily capture all of the individuals who would, given the right economic conditions, like to work, or work more hours (for example, full-time rather than part-time). The most encompassing measure, the U-6, considers the unemployed, plus all marginally attached workers (those who want and are available for work and have searched for a job in the past 12 months), plus those employed part-time for economic reasons, and divides this number by the labor force plus marginally attached workers. Both rates have declined steadily over the past decade, indicating that the labor market is on the road to recovery from the Great Recession:
Read beyond the headlines
Tomorrow, there will likely be a mix of celebratory and pessimistic reports on the new BLS employment statistics. Before you get caught up in the headlines, remember: no single measure tells the whole story.