Economic indicators ; Employment (Economic theory)

Brian Motley

English

Research Papers in Economics

FRBSF WEEKLY LETTER
Number 94-11, March 18, 1994
New Measures of the Work Force
The monthly report on employmentand unem-
ployment is one of the most closely watched
indicators ofthe state of the u.s. economy. Be-
~inning with the report for January 1994, the data
on employment and unemployment are based on
a new survey methodology that is expected to re-
flect today's labor force more accurately. Notably,
the firsttwo months of data showed more unem-
ployment than had the previous survey. This
Weekly Letter describes the new methodology
and discusses the implications of the revised
measures for inflation and monetary policy.
The Current Population Survey
Data on employment in the u.s. come from two
separate surveys, one of employers and another
of households. The survey of employers, com-
monly known as the survey of nonfarm business
establishments, h<;ls not been revamped. It counts
the number of payroll jobs and so excludes the
self-employed as well as certain areas of the
economy such as farm and household employ-
ment. The survey of households, known as the
Current Population Survey, has been substantially
changed: it attempts to count all civilian work-
ers, as well as people who are not working but
who want a job. This survey is the source of the
unemployment rate data.
Each month-during the week that includes the
19thday-interviewersfrom the Bureau oftheCen-
sus contact a scientifically selected sample of
60,000 households to collect data on the labor
force activities of each adult in the household
during the preceding week. From these data
the Bureau of Labor Statistics (BLS) constructs
monthly estimates of civilian employment and
unemployment.
The old survey questionnaire had remained es-
sentially unchanged since 1967, despite dramatic
changes in the u.s. labor market. More women
are in the paid work force and larger proportions
of the working population choose to work part-
time, rather than full-time, and to work at more
than one job. To account for these developments
in the labor force, the survey was revamped,
both by introducing new survey methods and
by changing and clarifying definitions.
Changes in the survey
The interviewers now use laptop computers,
which not only makes the process of interview-
ing easier, but also improves the accuracy ofthe
responses. For example, the computer supplies
follow-up questions that build on the replies al-
ready given, thus avoiding obviously irrelevant
questions that irritate respondents and make
them less willing to cooperate. Furthermore,
since the computer prompts the interviewer to
ask appropriate questions, it minimizes inter-
viewers' errors ofjudgment. Such errors may
have led to underestimation ofthe levels of
female employment and unemployment in the
previous survey. Specifically, interviewers fre-
quently assumed that women who stated that
they were not in paid employment outside the
home were "keeping house:' and so did not
count them as part of the labor force. In some
cases, these women may have been "keeping
house" and working in home businesses or
actively looking for paid jobs, and so were
part ofthe labor force as either "employed"
or "unemployed:'
The 'overlap' survey
Between July 1992 and December 1993, the
Census Bureau conducted parallel surveys using
both the old and the new questionnaires and
methodologies, in order to obtain estimates of
the effects ofthe changes on the principal aggre-
gates. Unfortunately, budget constraints limited
the sample size for the overlapsurvey to only
12,000 housing units, compared with 60,000 in
the main survey. As a result, the statistical sig-
nificance of the differences between the two
methods is rather low. The Census Bureau will
continue to conduct parallel surveys until July
1995, using the new survey for the large sample
and the old one for the smaller overlap sample.
This will provide further evidence on the effects
ofthe change in procedures. However, the BLS
will not publish the results from the overlap sur-
vey on a regular basis.85 86 87 88 89 90 91 92 93 94
Percent
Also beginning in January, the estimates now are
based on projections of the total population de-
rived from the 1990 Census of Population. The
change in the population structure, compared to
estimates based on the 1980 Census, boosts the
measured unemployment rate by about 0.1 per-
centage point. Taking account of this change as
well as ofthe new survey, the new data show a
rate of unemployment that is, on average, 0.6
percentage point higher than the previous survey.
However, this difference between the new and
old estimates should be viewed only as a rough
rule ofthumb that may not hold in any individual
month. In particular, there are indications that the
seasonal pattern of the new data is somewhat
different from the old, so that recent reported de-
clines in the unemployment rate may be over-
stating the true improvement.
on the new basis, whereas the male rate was only
0.2 percentage point higher. Moreover, the dif~
ference for females was statistically significant,
whereas that for males was not and could have
been due to chance. This supports the view that
the old survey produced a gender-bias in the re-
sults. The new survey yielded a 0.5 percentage
point lower participation rate for men and a
1 percentage point higher rate for women. The
new methodology also showed a significantly
higher unemployment rate for teenagers, blacks,
and Hispanics.
For the first time, the new survey asks respond-
ents whether they had more than one job, and
if so, how many jobs they held and how many
hours they worked in total and in their principal
job. These data will aid in reconciling the results
of this survey, which counts people, with the es-
tabiishmentsurvey, which counts jobs. in Feb-
ruary, 5.8 percent of employed persons (not
seasonally adjusted) reported that they held
more than one job.
New definitions
By asking more detailed questions about job-
search methods, the new survey will distinguish
more accurately between active and passive job-
search. Persons are supposed to be classified as
unemployed only if they were actively searching
for a job. Active job search means taking specific
actions, such as contacting an employment
agency, that may bring potential employers and
employees together. Passive activities, such as
looking at the want-ads, are not sufficient to
classify an individual as "unemployed."
New
Survey
~
Figure 2
Civilian Unemployment Rate
64
Figure 1
Labor Force ParticipationRate
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~ ~ ~ ~ ~OO ~ ~ ro M
67
65
More unemployed?
It appears that the new survey is yielding esti-
mates of the unemployment rate and of total em-
ployment that are higher than those from the old
survey. In 1993, the new survey produced an es-
timate of the unemployment rate that was on av-
erage 0.5 percentage point higher than the old
survey. Similarly, the average participation rate
-the proportion of the adult population that is in
the labor force-was 0.3 percentage point higher
in the new data. However, as shown in Figures 1
and 2, the gaps between the two measures varied
substantially from month to month.
66
Percent
68
FRBSF
At least on average, most ofthe difference in the
estimated unemployment rate was due to adif-
ference in the unemployment rate for women.
Over 1993 as a whole, the adult femaleunem-
ployment rate was 0.5 percentage point higher
More accurate probing of the reasons for part-
time employment is expected to lower the esti-
mate of the proportion ofthe labor force that is
working part-time "for economic reasons"-that
is, because poor economic conditions make itdifficult to find full-time work. In the new survey,
respondents must indicate that they want to work
full-time and were available to work full-time
during the reference week. During 1993, the par-
allel survey yielded an estimate of the proportion
of employed persons who were working part-
time for economic reasons of 4.2 percent com-
pared to 5.4 percent in the old survey.
It is frequently argued that the unemployment
rate underestimates the degree of joblessness,
because it excludes so-called discouraged
workers-people who are not looking for work
because they think no suitable jobs are available.
In the old survey, discouraged workers were de-
fined as unemployed people who have a desire to
work, but who are not actively seeking a job be-
cause they believe the search would be unsuc-
cessful. This definition was criticized because it
did not include an objective measure of "desire
to work;' and so might include people with only
a casual interest in finding a job. In the new sur-
vey, discouraged workers will be defined only as
those who have been active job-seekers some-
time in the previous twelve months or since their
last period of employment, and who were actu-
ally available for work in the reference week.
This change in definition will reduce the meas-
ured number of discouraged workers. In 1993,
the proportion of persons not in the labor force
who were classified as discouraged according
to the old definition was estimated as 1.7 percent
in the main survey and 1.5 percent in the overlap
survey. Using the new definition, the overlap sur-
vey estimated this proportion at only 0.7 percent.
Unemployment and inflation
Some economists argue that, in the short run, the
rate of inflation is inversely related to the gap be-
tween the current unemployment rate and the so-
called natural rate. These economists use this gap
as an indicator of the degree of pressure for a
change in the rate of inflation. For example, if
the level of aggregate demand is so strong that
unemployment is below its natural level, wages
and prices tend to be bid up more rapidly. Con-
versely, if aggregate demand is weak enough to
push unemployment above its natural rate, there
tends to be downward pressure on inflation. See
The Economist (1994).
So, does the new higher estimate ofthe unem-
ployment rate mean that the risk of increased
future inflation is less than previously thought?
Probably not, because changes in the measured
unemployment rate also alter our estimate of the
natural rate. In a changing economy, there always
will be some people who are unemployed as
they move from businesses or industries that are
contracting and reducing employment to others
that are expanding and taking on new workers.
Since finding a new job requires search, which
takes time, this dynamic process necessarily
involves some unemployment. The natural, or
equilibrium, rate of unemployment represents an
estimate of what the unemployment rate would
be if it included only these "frictionally unem-
ployed" individuals.
Empirical estimates of the natural rate often are
constructed by looking at the past history of un-
employment and inflation. These data are used to
estimate the unemployment rate above which in-
flation has tended to increase and below which
it has tended to decline in the past (see Weiner
1993). Hence, if past unemployment has been
underestimated, as appears to be the case, this
means that the natural rate also has been under-
estimated by roughly the same amount, leaving
the estimated gap between the actual and natural
rates of unemployment unaffected.
Most recent estimates of the natural rate (using
the old data) have placed it at about 6 percent,
though there is a relatively wide range of uncer-
tainty around this number. Hence, using the new
data, we infer that the natural rate is about 6Y2
percent. The 6.5 percent unemployment rate re-
ported for February suggests that it is approach-
ing the natural rate. But it is difficult to say this
with confidence, given the uncertainties about
the true equilibrium rate of unemployment, as
well as uncertainties about the seasonal pattern
-and hence the spread between the old and
new data in any single month. This means that
monetary policymakers face more uncertainty
than usual in using the unemployment rate as a
gauge of whether there are upward or downward
pressures on inflation.
Brian Motley
Senior Economist
References
"A Cruise around the Phillips Curve." 1994. The Econ-
omist (February 19) pp. 82-83.
Weiner, Stuart E. 1993. "New Estimates of the Natural
Rate of Unemployment:' Federal Reserve Bank of
Kansas City Economic Review (Fourth 'Quarter).
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A Cruise around the Phillips Curve.&quot;

New measures of the work force

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New measures of the work force

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