Washington Trust Bank Blog | Monthly Employment Situation Report: Are You Trying to Measure the Donut or the Hole?

Monthly Employment Situation Report: Are You Trying to Measure the Donut or the Hole?

Given the focus of the media on the monthly employment report, it is important to understand what is being measured and reported.

First, it is important to understand that there are two components to the Employment Situation Report. One is the survey that the Bureau of Labor Statistics (BLS) conducts with businesses to determine the number of jobs that are added each month. This is called the Establishment Survey and the purpose is to provide data about jobs. The second is a survey that the BLS conducts with households that is used to determine the unemployment rate. This is called the Household Survey and its purpose is to provide data regarding unemployment and employment. As Julius Shiskin, a former Commissioner of the Bureau of Labor Statistics, stated, one is measuring the donut (employment) while the other is measuring the hole (unemployment). Each survey has its quirks and nuances, but the key is to first understand whether you are seeking data about the “donut” or the “hole”. If you want to dig deeper into understanding the differences between the two surveys, go to the following website: www.bls.gov/web/empsit/ces_cps_trends.pdf

The rest of today’s blog focuses on the Household Survey (the “hole”) and the nuances of the unemployment data. This post will run longer than normal because of the number of tables included.

Let us start by understanding how the BLS measures the official unemployment rate. On the surface, the calculation for the official unemployment rate is straightforward:

Official Unemployment Rate = Unemployed divided by Labor Force

• Currently (7/31/16) the U.S. has 7,770,000 people who are classified as unemployed;
• The Labor Force is 159,287,000
• 7,770,000/159,287,000 = 4.9%

How does that compare to where we were before the recession started?

Category	12/31/2007	7/31/2016	Change	Percent Change
Unemployed	7,645,000	7,770,000	125,000	1.6%
Labor Force	153,918,000	159,287,000	5,369,000	3.5%
Official Unemployment Rate	5.0%	4.9%		(0.1%)

 

From a pure statistical standpoint, the above information shows us that, when measured by the unemployment rate, we are back to where we were before the Financial Crisis hit and recession started.

The question that arises is whether we are measuring the right “hole”. There is plenty of debate from both sides of this argument. Rather than rehashing the debate, I will discuss this from the perspective of “what are you trying to measure?” Are you interested in knowing how many people are actively looking for work or are you interested in how many people do not have a job but want a job? Depending on which of those two situations you are trying to measure or understand, the answer will be different and you should consider different measures. The BLS believes that the official unemployment rates should only measure those who are actively seeking employment. They then supply additional data that gives perspective on people who want a job and are currently available for work, but are not classified as unemployed. The problem is that, in general, the media only covers the official unemployment rate.

The following are the definitions of the alternative measures that the BLS tracks.

Unemployed:

1. People are classified as unemployed if they do not have a job, have actively looked for work in the 4 weeks preceding the survey, and are currently available for work. Unemployed are part of the labor force.

Marginally Attached:

1. People are marginally attached if they have not actively looked for a job in the 4 weeks preceding the survey but want a job, are currently available for work and had actively looked for work sometime in the last 12 months. Marginally attached individual are not part of the labor force.

Discouraged:

1. People are discouraged if they have not actively looked for a job in the 4 weeks preceding the survey but want a job, are currently available for work, have actively looked for work sometime in the last 12 months but are not currently looking for work because they believe that there are no jobs available for them. Discouraged are not part of the labor force.

Involuntary Part-Time:

1. Involuntary part-time individuals are people who prefer full-time work but are working part-time for economic reasons (i.e. their hours had been cut back or they were unable to find full-time employment). Involuntary part-time are part of the labor force.

Again, depending on what you are trying to measure, you may decide that you need something different than the official unemployment rate. The BLS has supplied 3 alternative measures that incorporate the components discussed above. To do this, they add the desired category to the unemployed data as well as to the labor force data if the category is currently not part of the labor force (i.e. Discouraged and Marginally Attached)

 

Category	12/31/07	7/31/16	Change From 12/31/07 – – 7/31/16	Percent Change 12/31/07- 7/31/16	Percent of 12/31/07 Labor Force	Percent of 7/31/16 Labor Force	Change From 12/31/07 -7/31/16
Labor Force	153,918,000	159,287,000	5,369,000	3.5%	100%	100%	0%
Unemployed	7,645,000	7,770,000	125,000	1.6%	5.0%	4.9%	(0.1%)
Official Unemployment Rate (U3)	5.0%	4.9%	N/A	(0.1%)	N/A	N/A	N/A
Discouraged	363,000	591,000	228,000	62.8%	0.2%	0.4%	0.2%
U4 Unemployment Rate (Unemployed + Discourage)	5.2%	5.2%	0.0%	N/A	N/A	N/A	N/A
Marginally Attached	1,344,000	1,950,000	606,000	45.1%	0.9%	1.2%	0.3%
U5 Unemployment Rate (Unemployed plus Marginally Attached)	5.8%	6.1%	0.3%	N/A	N/A	N/A	N/A
Involuntary Part Time	4,618,000	5,940,000	1,322,000	28.6%	3.0%	3.7%	0.7%
U6 Unemployment Rate (Unemployed plus Involuntary Part Time)	8.8%	9.7%	0.9%	N/A	N/A	N/A	N/A

 

If you are measuring how many people are actively looking for a job, then you probably should look at the official unemployment rate (U3). If you are measuring the unemployment situation for all of the people who want a job and are available but may not have been active during the survey period, then you should look at U5. As you can see from the table above, the story is slightly different depending on which “hole” you are measuring. U3 is actually .1% lower than where we were when the recession started but U5 is still .3% higher.

Here is some other interesting information from the Household Survey that does not necessarily get reported by the headline news:

Employment Growth

How are we doing with employment growth? The Household Survey provides this information. Note that employment growth is different than jobs growth. The Establishment Survey measured jobs growth and for that survey any job is a job. So a 5 hour part-time job is the same as a 40 hour full-time job. The Household Survey treats employment differently. If a survey respondent indicates that they are holding down 3 part-time jobs that total 40 hours per week, the Household Survey strictly counts that as 1 person being employed. So, don’t try to compare employment growth with jobs growth.

 

Category	12/31/07	7/31/16	Change From 12/31/07 -7/31/16	Percent Change 12/31/07-7/31/16	Percent of 12/31/07 Labor Force	Percent of 7/31/16 Labor Force	Change From 12/31/07 -7/31/16
Employment	146,273,000	151,517,000	5,244,000	3.6%	95.0%	95.1%	.1%
Full Time	121,609,000	123,892,000	2,283,000	1.9%	79.0%	77.8%	(1.2%)
Part Time	24,745,000	27,595,000	2,850,000	11.5%	16.1%	17.3%	1.2%
Involuntary Part-Time	4,618,000	5,940,000	1,322,000	28.6%	3.0%	3.7%	0.7%
Millennials   (16-34)	51,182,000	52,574,000	1,392,000	2.7%	33.3%	34.2%	0.9%
Generation X (35-54)	68,845,000	64,229,000	(4,616,000)	(6.7%)	44.7%	41.7%	(3.00%)
Baby Boomer (55+)	26,246,000	34,714,000	8,468,000	32.3%	17.1%	22.6%	5.5%

 

The take-away from this data is that companies are hiring  more part-time workers than full-time workers since 12/31/2007. The data does not tell us why, but feedback from many of the businesses that we work with indicates it is due to new regulations that have been passed and caution over the growth prospects for the economy. There may also be a component tied to the rise of job sharing. The one piece of information that the data does show us is that almost half of the increase in part-time employment is due to people wanting full-time work but only able to find part-time work.

 

The second take-away from the above table is that Generation X has suffered the most in trying to find employment since the recession. There are 4,616,000 fewer people of that age bracket employed now compared to when the recession started. The curious information is the strong growth in employment from the Baby Boomer generation. Again, the data does not tell us why this is the case. A couple reasons may be: the rise in “grey” divorces may be causing a spouse who had previously stayed at home to enter the work force, or perhaps it is a sign that many Baby Boomers have failed to save enough for retirement and have re-entered the work force.

 

Hopefully this information has helped you focus on what part of the “hole” you may want to focus on. The headline media may focus on the official unemployment rate, but the information behind the headlines may actually provide far more useful information for you.

 

My next blog post will focus on the “donut” (i.e. jobs) and share insight into what information lies behind the headlines of monthly jobs creation.

The views or opinions in this article are those of the author and do not necessarily represent the views of Washington Trust Bank or senior management. Washington Trust Bank believes that the information used in this blog was obtained from reliable sources, but we do not guarantee its accuracy. Neither the information nor any opinions expressed constitutes a solicitation for business or a recommendation of the purchase or sale of securities or commodities.

 

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