Source: Images of Business Cycle created by Kate Eskra
Hi. Welcome to macroeconomics. This is Kate. This tutorial is on the employment report and the unemployment rate. As always, my key terms are in red, and my examples are in green. So in this tutorial, we'll talk about how unemployment is measured and what the employment report includes. You'll understand why the unemployment rate and non-farm payroll are considered lagging indicators. And you'll recognize that the process of calculating these figures creates a significant margin of error.
OK. So you've seen a business cycle before, and you know it's normal for the economy to go through periods of growth and contraction. Most people along the business cycle are concerned about things such as the unemployment rate and inflation. In this tutorial, we're talking about the unemployment rate. Economists use a lot of different kinds of data to help them do all of these things-- predict where we're headed, explain what's just occurred, and look at what is currently happening in the economy.
Calculating employment and unemployment and understanding it is a really big part of this. So the employment situation is what we're going to talk about first. The Bureau of Labor Statistics publishes the employment situation summary every month. And the first part of this report details the number of jobs created in the economy by sector. So it breaks it down. And it shows either an increase or decrease in non-farm payrolls.
So if you are interested at all in seeing any of these releases, you can access this link right here. I just provided one for you so that you could see what the most current one, as of right now, had looked like. But if you want to see what it is when you're listening to this, you can go to that website and check it out. But just for these purposes, I wanted to show you how it's worded.
So from the January, 2014 report, for example, it says total non-farm payroll employment edged up in December by 74,000. In 2013-- so now they're giving us the overall year-- job growth averaged 182,000 per month, about the same as in 2012. So they're giving a comparison. And they're talking about now a little bit more specifics.
In December, job gains occurred in retail trade and wholesale trade, while employment declined in information. So that's kind of the snapshot. It's their basic overall summary. But then the report is much, much, much more detailed from there. And if you're interested at all, you can take a look at it. So they kept mentioning non-farm payroll. Non-farm payroll is just the number of individuals employed outside the farming sector. So it's important to know the farming sector is not included in these.
So the unemployment rate is also measured. Those were all figures on jobs created or jobs lost. And that's employment. But the unemployment rate is also measured by the BLS. And again, I did the same thing here. I just took the most recent one for me. And you can access the most recent one for you. This one states that, from the January, 2014 report, the number of unemployed persons declined by 490,000 to 10.4 million in December. The unemployment rate, then, declined by 0.3 percentage points to 6.7%. Again, the report is more detailed from there. But that's kind of the snap shot of what was going on.
So unemployment is defined as, it's measured as a percentage rate of the number of individuals that would like to work and are an active part of the labor force, to the number of individuals that comprise the active labor force. So let's just talk for a little bit about what unemployment is and break down that definition.
So to be unemployed, you have to be a person 16 years or older. Who's, first of all, you're not working. Second, you have to be available for work. And finally, you have to have made efforts to find work during the last four weeks. So if you are reading that definition and you're saying to yourself, huh? Yeah. Because of this definition, the unemployment rate generally discussed in the media doesn't actually represent the full number of people who are actually unemployed. There is a margin of error up or down.
So let's break it down though. Not in the labor force are people who are either not looking for work because he or she does not want a job or has given up looking. The labor force are the number of people employed plus the number of people unemployed. So it's important to distinguish that from the overall population. The overall population is people who are in the labor force or not in the labor force.
So when we calculate the unemployment rate, we take the number of people unemployed, and we divide by the labor force, not the overall population. So because it's impossible to really know every single person in this situation-- because not everyone files for unemployment-- what the government does, where this rate comes from, is the government conducts a monthly sample survey. It's called the Current Population Survey, or CPS. And what this survey does is, it includes about 60,000 households-- approximately 110,000 individuals-- and they try to make sure that it's representative of the entire US population.
And interviewers ask questions about household members' labor force activities. And then people are classified either as employed, or people who have jobs. Unemployed-- people who don't have jobs, are looking for work and are available for work-- or not in the labor force, people who are neither employed nor unemployed. So like anyone under the age of 16, retirees, stay at home parents, et cetera.
So this survey process does have a margin of error. Because it relies on a lot of statistical estimates of labor force participation rates, of the number of people actively seeking a job, and of the number of people who are no longer actively looking for a job. Some of those people who are no longer actively looking for a job are what we consider marginally attached, or marginalized workers. If you go to that website I provided for you, you'll see this wording, or discouraged workers-- people who have completely just given up looking, because they don't think there's any hope anymore of finding a job.
So unemployment is considered a lagging indicator. And why is it a lagging indicator? Remember, a lagging indicator shows-- it is something that describes what has happened already in the economy. Well part of it's because businesses respond to an upturn in the economy. So when they see an increase in demand for their good or service, then they hire more workers and start producing more. Firms also do the same thing in the opposite situation. They respond to a downturn in the economy. And when they see the decrease in demand for their goods or service, that's when they then start to lay off workers and produce less.
So unemployment does move with the business cycle, but it generally lags behind. People get their jobs back only after the economy has already begun to recover. OK? So that's what we call a lagging indicator. Because of the statistical issues that we went through a little bit in calculating an accurate unemployment rate, it's not a perfect indicator of how our economy is performing at all.
So I'm giving you an example here. During a long recession, the unemployment rate might actually be much higher than the one discussed in the media. Because there really might be a lot more people who would want a job, but they're no longer considered unemployed because they've just given up looking. So the longer a recession lasts, the more this can, in fact, be the case. These are people we call discouraged workers.
There also might be a lot of people working part time. They've had their hours cut. Those people are not considered unemployed. Yet working 10, 15 hours a week is certainly not helping them to pay-- well, it's helping them to pay the bills, but it's not going to cover everything. They would want to work a lot more hours. So the unemployment rate that's published, let's say, doesn't take these things into consideration.
So the unemployment rate is still one of the most popular economic indicators though discussed. And that's because it gives macroeconomists an idea of how firms are responding to economic conditions, how they feel about the economy, and how many people in our labor force are not being utilized. It is important to keep in mind that there's a significant margin of error. So one of the things I remember hearing a long time ago was that job gains can actually err by 100,000. That's a lot in that report. And the unemployment rate can kind of err by plus or minus about 0.2% at any given time.
So in this tutorial, we talked about how unemployment is measured and what the unemployment report includes. We talked about the unemployment rate and how job gains are both considered lagging indicators. And because of the survey process of estimating all of these figures, we need to keep in mind that there is a significant margin of error.
Thank you so much for listening. Have a great day.