Unemployment

LEARNING OBJECTIVES

 

Unemployment can be a terrible and wrenching life experience—like a serious automobile accident or a messy divorce—whose consequences can be fully understood only by someone who has gone through it. For unemployed individuals and their families, there is the day-to-day financial stress of not knowing where the next paycheck is coming from. 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. But unemployment also includes economic costs to the broader society. When millions of unemployed but willing workers cannot find jobs, an economic resource is going 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 could have been produced by the unemployed workers.

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

(Source: Federal Reserve Economic Data (FRED) https://fred.stlouisfed.org/series/UNRATE

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 Great Depression of the 1930s, 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. 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. Indeed, it never seems to get below 3%—and it stays that low only for very short periods. (Reasons why this is the case are discussed 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. 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 nearly quadrupled from 76 million in 1900 to over 314 million by 2012. 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 composed 18% of the paid workforce in 1900 and nearly half of the paid workforce in 2012. But 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.

How to calculate the unemployment rate

Where does the data about unemployment come from?

The government conducts a monthly survey called the Current Population Survey (CPS) to measure the extent of unemployment in the country. The CPS has been conducted in the United States every month since 1940, when it began as a Work Projects Administration program. In 1942, the U.S. Census Bureau took over responsibility for the CPS.

The Current Population Survey (CPS), also referred to as the household survey, is a monthly sample survey of 60,000 eligible households.

The household survey sample is designed to reflect the civilian noninstitutional population. This population excludes people serving in the Armed Forces, and people living in institutions such as residential nursing and care facilities and correctional institutions.

Based on responses to survey questions about work and job search activities, each person age 16 and over in the sample is classified as employed, unemployed, or not in the labor force.

The household survey labor force measures are available by many demographic characteristics, including age, sex, race, Hispanic or Latino ethnicity, and educational attainment. Labor force characteristics such as usual full- and part-time status, multiple jobholding, duration, and reason for unemployment are also available.

Who is employed, unemployed or  not in the labor force?

Employed Unemployed Not in the labor force
 

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.

  

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

  

Not in the labor force includes all people in the civilian noninstitutional population who do not meet the above definitions of employed or unemployed

Labor Force = Employed + Unemployed

Those who are working or willing to work

How to calculate the unemployment rate?

The unemployment rate is the percentage of the labor force who is unemployed:

Unemployment rate =  (Unemployed / Labor Force) x 100

Unemployment rate (May 2017) = (6.9 million / 160) x100 = 4.3%

 

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.

Labor Participation Rate =

(Labor Force / Civilian Population over 16) x100

Labor Participation Rate (May 2017) = (160/254.8)x100=62.7%

Labor Underutilization

Even with the “out of the labor force” category, there are still some people that 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 who are looking for full time and permanent employment that are counted as employed, though they are not employed in the way they would like or need to be.

Additionally, there are individuals who are underemployed. This includes those that are trained or skilled for one type or level of work who are working in a lower paying job or one that does not utilize their skills. For example, an individual with a college degree in finance who is working as a sales clerk would be considered underemployed. They are, however, also counted in the employed group.

 

There are also workers who are not in the labor force but who want and are available for work, and who have looked for a job sometime in the prior 12 months, but were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey.  Those workers are marginally attached to the labor force.  Among the marginally attached, discouraged workers were not currently looking for work specifically because they believed no jobs were available for them or there were none for which they would qualify.

Unemployment Rates by Group

Unemployment is not distributed evenly across the U.S. population, charts below shows unemployment rates broken down in various ways: by gender, age, and race/ethnicity.

 

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 shown in  (a). During the recession of 2008-2009, the unemployment rate for men exceeded the unemployment rate for women. 

Char 15 shows unemployment rate by gender and for teenagers.
 

Younger workers tend to have higher unemployment, while middle-aged workers tend to have lower unemployment. Younger workers move in and out of jobs (and in and out of the labor force) more easily. 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.
 

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 shown in Chart 16. 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 (Chart 17). In February 2015, for example, the unemployment rate for those with a college degree was 2.7%; for those with some college but not a four year degree, the unemployment rate was 5.1%; for high school graduates with no additional degree, the unemployment rate was 5.4%; and for those without a high school diploma, the unemployment rate was 8.4%. This pattern may arise because additional education offers better connections to the labor market and higher demand, or it may occur because the labor market opportunities for low-skilled workers are less attractive than the opportunities for the more highly-skilled.