An abstract for this article is not available.Labor market

William E. Cullison

English

Research Papers in Economics

ON LABOR MARKET INDICATORS 
William E. Cullison 
The  unemployment  rate  is,  perhaps,  the  most 
closely  watched  of  all  economic  statistics.  In  many 
quarters,  it  is  taken  as  a  good  indicator  of  current 
economic  conditions  and  of  overall  well-being  in  the 
country.  Among  professionals,  however,  the  unem- 
ployment  rate  is  widely  recognized  as  a  controversial 
statistic  that  is  often  of  limited  accuracy  as  a measure 
of  labor  market  conditions  as  well  as  of  general 
welfare.  As  it  is  currently  structured,  the  statistic 
is  designed  to  measure  the  extent  of  the  so-called 
“involuntary”  unemployment  in  the  economy.  Thus, 
unemployment,  as  defined  by  the  Bureau  of  Labor 
Statistics,  includes  only  those  persons  who  are  not 
employed  and  are  actively  seeking  work.  This  defi- 
nition  of  unemployment  is  a  source  of  pitfalls  for  the 
social  as  well  as  the  economic  interpretation  of 
changes  in  the  statistic. 
One  such  pitfall  relates  to  the  so-called  “discour- 
aged”  worker  effect.  “Discouraged”  workers  are 
workers  who  are  unemployed  but  who  have  been 
frustrated  with  their  job  search  and  no longer  actively 
seek  work.  These  workers  are  not  included  in  the 
unemployment  statistics.  The  number  of  “discour- 
aged”  workers  varies  with  the  state  of  the  economy, 
and  because  such  workers  are  excluded  from  the 
unemployment  statistics,  the  unemployment  rate  may 
understate  labor  market  slackness  during  recessions 
and  understate  labor  market  tightness  during  re- 
coveries. 
The  “discouraged”  worker  effect  is  not  the  only 
source  of dissatisfaction  with  the  unemployment  rate’s 
usefulness  as  an  indicator.  Others  include  the  so- 
called  “additional”  worker  effect  (another  member 
of  the  household  enters  the  labor  market  to  supple- 
ment  the  family’s  income  when  the  principal  bread- 
winner  loses  his  job)  and  the  definition  of  employ- 
ment  (part-time  workers  are  defined  as  employed 
even  if  they  desire  full-time  work).  Professionals,  of 
course,  have  been  aware  of these  limitations  for  years. 
The  criticisms  have  intensified  recently,  however, 
because  the  unemployment  rate’s  usefulness  as  a 
coincident  indicator  has  apparently  diminished  since 
1969. 
Before  1969,  turning  points  in  the  unemployment 
rate  tended  to  coincide  with  those  in  other  important 
indexes  of  economic  activity.  During  the  1970  re- 
cession  and  the  subsequent  recovery,  however,  the 
unemployment  rate  rose  above  6  percent  and  re- 
mained  close  to  its  cyclical  peak  until  June  1972,  well 
after  recovery  had  begun.  The  20-month  plateau 
around  the  6  percent  peak  level  was  the  longest  such 
aberration  in  the  history  of  the  series.  Moreover,  the 
unemployment  rate  has  never  since  regained  its  low 
1968  and  1969  levels.  Throughout  the  first  months 
of  1973,  when  other  economic  indicators  were  rising 
strongly  and  the  economy  was  approaching  full  ca- 
pacity,  the  unemployment  rate  continued  to  indicate 
a  relatively  slack  labor  market. 
Gauging  Labor  Market  Pressures.  Economic 
statisticians  have  long  recognized  that  unemployment 
data  should  be  interpreted  in  the  light  of  the  behavior 
of  other  labor  market  statistics,  especially  that  of 
employment  data.  Geoffrey  Moore,  former  U.  S. 
Commissioner  of  Labor  Statistics,  has  made  a  com- 
pelling  argument  that  employment  data  are,  as  a 
matter  of  fact,  superior  to  unemployment  data  as 
labor  market  indicators.  In  one  of  his  more  recent 
statements,  written  for  the  Wall  Street  Journal,1  he 
reasons  as  follows  : 
.  .  . the  concept  of  employment  is  firmer  than  the 
concept  of  unemployment.  Having  a  job  and  being 
paid  for  it  is,  for  the  most  part,  an  observable 
experience.  .  .  .  The  concept  of  unemployment  is 
quite  different.  For  those  who  have  had  a  job  and 
have just  been  laid  off,  the  situation  may  be 
obvious.  Nevertheless,  unless  the  worker  is  doing 
something  to  seek  work,  he  will  not  be  counted  as 
unemployed  .  .  .  .  Moreover,  those  who  .  .  .  have 
been  laid  off  usually  constitute  less  than  half  of  the 
unemployed.  The  rest  have  either  quit  their  jobs 
voluntarily  or  have  not  recently  (or  ever)  had  a 
job.2 
Another  important  consideration,  also  noted  by 
Moore,  is  that  the  employment  numbers,  being  sub- 
stantially  larger  than  the  unemployment  numbers, 
contain  less  relative  sampling  error. 
Most  observers  no  doubt  would  agree  with  Moore 
respecting  the  technical  superiority  of  the  employ- 
ment  figures.  But  a  practical  problem  in  relying 
exclusively  on  employment  data  is  there  is  no  gener- 
ally  agreed  upon  standard  against  which  to  measure 
changes  in  employment.  Moore  has  suggested  a 
simple  employment/population  ratio  as  a  yardstick, 
but  such  a  ratio  may  itself  suffer  from  serious  limi- 
tations. 
1 Geoffrey  Moore.  “A  Measuring  Stick  for  Employment,”  Wall 
Street  Journal, May  9,  1975. 
2 Ibid. 
FEDERAL  RESERVE  BANK  OF  RICHMOND  3 This  article  examines  Moore’s  employment/popu- 
lation  ratio  in  detail  and  proceeds  to  develop  a  some- 
what  more  refined  “labor  market  pressure  index” 
that  may  offer  an  even  more  sensitive  indicator  of 
labor  market  conditions. 
Moore’s  Employment/Population  Ratio  The  data 
for  Moore’s  employment/population  ratio  were  de- 
rived  simply  by  dividing  the  number  of  persons 
employed  by  the  total  working  age  population.  For 
purposes  of  this  article,  that  technique  was  modified 
slightly  and  the  ratios  were  calculated  by  dividing 
those  employed  (16-64)  by  the  population  (civilian 
resident  non-institutional)  in  that  age  bracket.  This 
ratio,  along  with  the  unemployment  rate,  is  plotted 
in  Chart  1 for  the  period  January  1955  to  June  1975. 
The  chart  clearly  shows  that  the  employment/popu- 
lation  ratio  for  all  civilian  workers,  in  contrast  to 
the  unemployment  rate,  exhibits  a  definite  upward 
secular  trend  over  the  time  period  as  a  whole.  The 
upward  trend  has  been  particularly  pronounced  since 
1965,  and  as  a  result  each  succeeding  month  of  1974 
set  a  new  record  high.  This  behavior  pattern  differs 
considerably  from  that  of  the  unemployment  rate, 
which  has  not  yet  regained  its  1969  level. 
The  theoretical  rationale  usually  associated  with 
the  well-known  Phillips  curve  relationship  argues 
that  as  an  economy  approaches  full  utilization  of  its 
labor  resources,  certain  scarcities  of  critical  skills 
develop.  As  firms  endeavor  to  expand  production, 
they  must  bid  against  one  another  for  workers,  thus 
introducing  upward  pressure  on  wages  and,  ulti- 
mately,  prices.  Conversely,  slack  conditions  in  labor 
markets  cause  wage  and  price  pressures  to  subside. 
But  the  experience  of  1973-1974  did  not  follow  this 
script.  Moore  has  indicated  that  part  of  this  apparent 
anomaly  may  be  attributable  to  the  statistical  defi- 
ciencies  in  the  unemployment  rate  as  an  economic 
indicator.  Indeed,  his  employment/population  ratio 
conforms  more  closely  than  the  unemployment  rate 
to  the  relationship  between  inflation  and  labor  market 
conditions  that  was  widely  accepted  in  the  1960’s. 
The  high  levels  of  the  employment/population  ratio 
in  1973  and  early  1974  coincide  with  the  rapid  rates 
of  increase  in  the  consumer  price  index  at  that  time. 
As  Moore  notes: 
High  employment  ratios  have  been  associated  with 
high  rates  of  inflation.  .  .  .  There  has  been  rela- 
tively  little  inflation  when  the  percentage  employed 
has  been  in  the  range  53.5%  to  55.5%,  but  higher 
employment  ratios  have  been  associated  with  in- 
creasingly  sharp  advances  in  the  rate  of  inflation. 
.  .  .  In  general,  rates  of  wage  and  price  inflation 
have  been  far  more  closely  correlated  with  the 
employment  ratio  than  with  the  unemployment 
rate.  .  .  .  In  particular,  1974  was  .  .  .  in  a  class  by 
itself,  with  considerable  unemployment  and  a  great 
deal  of  inflation.  What  was  largely  overlooked 
was  the  record  high  employment  ratio.3 
A  Critical  View  Moore’s  employment  ratio 
represents  a  useful  contribution  to  the  interpretation 
of  labor  market  statistics  and  provokes  further  re- 
finement  of  this  sort  of  analysis.  Some  of  these 
refinements  cast  doubt  on  the  inferences  he  draws 
respecting  the  relationship  between  the  employment 
ratio  and  inflation  pressures.  For  example,  when 
the  employment/population  ratio  for  all  civilian 
workers  is  separated  into  male  and  female  compo- 
nents,  plotted  in  Chart  1,  the  data  no  longer  lend 
unambiguous  support  to  Moore’s  inference. 
The  behavior  of  the  ratio  for  all  civilian  workers 
over  the  period  observed  results  from  two  conflicting 
trends.  The  male  employment/population  ratio  ex- 
hibits  a  definite  downward  trend  from  1955-1975. 
This  ratio,  in  fact,  was  higher  during  the  1960-1964 
time  period,  a  period  of  relatively  stable  prices,  than 
it  was  in  the  1972-1974  time  period. 
The  female  employment/population  ratio,  in  pro- 
nounced  contrast  to  the  male  series,  exhibits  a  sub- 
stantial  upward  trend  over  the  same  time  period. 
This  upward  tendency,  of  course,  is  associated  with 
well-known  changes  in  women’s  work  preferences, 
and  it  is  particularly  pronounced  since  1965.  In  any 
event,  the  upward  trend  in  female  employment  more 
than  offset  the  downward  trend  in  the  male  ratio,  and 
as  a  result  the  total  employment/population  series 
exhibited  a  moderate  but  definite  upward  trend. 
This  domination  of  the  total  employment/population 
series  by  increased  female  participation  leads  to  some 
ambiguity  in  interpreting  the  series. 
The  record  ratios  registered  in  1973  and  1974, 
for  example,  can  logically  be  interpreted  in  either 
of  two  conflicting  ways.  They  may,  as  Moore  sug- 
gests,  indicate  labor  scarcities.  On  the  other  hand, 
the  higher  percentage  employed  may  have  been  en- 
tirely  attributable  to  an  increased  supply  of  females 
in  the  labor  force  and  thus  indicate  nothing  about 
labor  market  slackness  or  tightness.  Viewed  from 
this  perspective,  the  closer  association  of  prices  with 
the  employment  ratio  could  possibly  reflect  nothing 
more  than  parallel  trends  in  excess  aggregate  demand 
and  increased  female  participation  in  the  labor  force 
in  the  late  1960’s  and  early  1970’s. 
Employment  ratios  adjusted  for  long-term  trends 
in  labor  force  participation  and  calculated  for  major 
labor  force  groups  might  represent  a  useful  refine- 
ment  of  Moore’s  efforts  to  improve  the  interpretation 
3 Ibid. 
4  ECONOMIC  REVIEW,  JULY/AUGUST  1975 Chart  1 
EMPLOYMENT/POPULATION  RATIO  AND  UNEMPLOYMENT  RATE  (INVERTED) 
JANUARY  1955  -  JUNE  1975 of  labor  market  data.  A  so-called  “employment  pres- 
sure  index”  directed  toward  this  end  is  offered  in 
the  paragraphs  that  follow. 
The  Employment  Pressure  Index  The  employ- 
ment  pressure  index  is  a  measure  of  excess  supply  or 
excess  demand  for  labor.  An  underlying  assumption 
in  the  construction  of  the  index  is  that  actual  em- 
ployment  is  a proxy  for  labor  demand  and  that  popu- 
lation  and  trends  in  participation  rates  determine 
long-term  labor  supply.  Its  theoretical  basis  is  de- 
scribed  in  detail  elsewhere.4  Briefly,  however,  it  is 
derived  by  dividing  actual  employment  figures  by 
estimates  derived  from  long-term  trend  and  changes 
in  population. 
The  employment  estimates  were  derived  from  the 
equation 
ET=  a +  b1t  +  b2t2 +  b3P 
where ET  is  the  employment  estimate,  t  is  time 
(January  1954  =  1),  and  P  is  population  in  the 
relevant  group.  The  least  squares  multiple  regres- 
sion  technique  was  used  to  estimate  a,  b1,  b2,  and  b3. 
Separate  estimations  were  made  for  each  of  sixteen 
employment  categories  grouped  by  sex,  race,  and  age 
(16-19,  20-24,  25-34,  35-64)  from  monthly  data  for 
the  1955-1975  time  period.  The  estimates  for  each 
of  the  categories  were  then  summed  to  get  an  aggre- 
gate  estimate  for  each  month,  and  the  total  was 
divided  into  the  actual  employment  figure  for  the 
appropriate  month  to  determine  the  pressure  index. 
The  resulting  data  for  the  period  January  1955 
through  June  1975  are  shown  in  the  Appendix. 
Chart  2  shows  the  employment  pressure  index  for 
total  employment  in  comparison  to  the  unemploy- 
ment  rate. 
Interpreting  the  Pressure  Index  The  employ- 
ment  pressure  index  takes  changing  work  preference 
patterns  into  account,  because  long-run  changes  in 
labor  supply  are  incorporated  into  the  trends.  Be- 
cause  of  this,  the  pressure  index  data  parallel  the 
unemployment  rate  data  much  more  closely  than 
employment/population  ratios.  Even  so,  there  have 
been  some  important  differences  between  the  unem- 
ployment  rate  and  the  employment  pressure  index 
(EPI),  particularly  since  1970. 
During  the  1970-1971  recession,  when  the  unem- 
ployment  rate  leveled  off  at  approximately  6  percent, 
the  EPI  continued  to  fall,  not  reaching  a  definite 
lower  turning  point  until  June  1971.  After  that, 
4 See  William  Cullison,  “An  Employment  Pressure  Index  as  an 
Alternative  Measure  of  Labor  Market  Conditions.”  The  Review  of 
Economics  and  Statistics,  Vol.  57.  No.  1,  February  1975,  for  a 
detailed  description  of  the  theory  underlying  the  employment  pres- 
sure  index. 
according  to  the  pressure  index,  a  vigorous  recovery 
in  the  labor  market  ensued,  reaching  a  peak  in 
January  1974  and  remaining  at  relatively  high  levels 
until  August  of  that  year. 
Thus,  the  pressure  index  indicated  that  labor 
market  conditions  were  much  tighter  during  the 
fourth  quarter  of  1973  and  the  first  quarter  of  1974 
than  did  the  unemployment  rate.  The  index  had,  by 
then,  recovered  to  its  1968  level,  while  the  unemploy- 
ment  rate  averaged  5.0  percent  compared  with  3.6 
percent  in  1968.  Hence,  it  appears  that  the  EPI 
may  have  been  the  better  indicator  of  the  extent  of 
the  recovery  from  the  1969-1970  recession,  although 
both  indicators  pointed  to  a  substantial  deterioration 
in  employment  conditions  beginning  in  September 
1974. 
Chart  2  also  shows  employment  pressure  indexes 
and  unemployment  rates  for  males  and  females  sepa- 
rately.  Although  the  relationship  between  the  EPI 
and  the  unemployment  rate  is  much  closer  for  males 
than  for  females,  it  is  obvious  that  a  close  relation- 
ship  exists  for  both  groups.  Using  the  EPI,  a 
picture  emerges  of  tight  labor  markets  for  both  male 
and  female  workers  in  1974  that  is  consistent  with 
Moore’s  conclusion  about  employment  during  that 
year.  The  employment  pressure  index  for  males 
reached  a  record  level  in  January  1974,  and  the  EPI 
for  females  recorded  relatively  high,  although  not 
record  levels,  throughout  the  first  half  of  1974. 
The  pressure  index  thus  tends  to  corroborate 
Moore’s  conclusions  that  in  early  1974  the  employ- 
ment  statistics  were  considerably  more  consistent 
with  the  behavior  of  price  and  other  economic  data 
than  were  the  unemployment  data.  The  employment 
pressure  index  indicates  a  great  deal  of  pressure  on 
labor  markets  at  that  time,  although  a  record  level 
only  for  males.  However,  much  of  the  inflation 
during  1974  has  been  attributed  to  scarcities  of  raw 
materials  and  other  basic  production  inputs  and  foods. 
Increased  production  of  basic  commodities  may  have 
necessitated  a  more  male-intensive  labor  force  than 
production  increases  in  other  types  of  commodities 
would  have,  and  according  to  the  EPI,  employable 
males  were  scarce  in  early  1974. 
Finally,  the  recent  behavior  of  the  EPI  is  note- 
worthy.  Although  the  unemployment  rate  indicates 
further  deterioration  in  the  employment  scene:  in 
April  and  May  (1975),  the  EPI  indicated  some  im- 
provement  in  each  of  the  two  months.  Final  con- 
clusions  are,  of  course,  premature,  but  the  employ- 
ment  pressure  index  may  thus  be  indicating  that  the 
downturn  ended  in  March  and  that  recovery  is  under 
way. 
6  ECONOMIC  REVIEW,  JULY/AUGUST  1975 Chart  2 
EMPLOYMENT  PRESSURE  INDEX  AND  UNEMPLOYMENT  RATE  (INVERTED) 
JANUARY  1955  -  JUNE  1975 Summary  A  number  of  arguments  have  been  The  difficulty  with  using  employment  data  as  an 
cited  for  the  use  of  employment  in  conjunction  with  economic  indicator,  however,  has  been  that  there  is 
unemployment  statistics  as  economic  indicators.  no  standard  against  which  to  measure  changes  in 
Basically,  these  arguments  are  :  employment.  Geoffrey  Moore  suggested  that  an 
1. 
2. 
3. 
Employment  data  are  firmer,  involving  fewer  employment/population  ratio  might  provide  an  ap- 
definitional  problems.  propriate  measuring  stick  for  labor  market  condi- 
Employment  data  are  subject  to  less  relative  tions.  A  refinement  on  this  ratio,  represented  as  the 
sampling  error.  employment  pressure  index  and  developed  in  this 
Employment  data  are  not  biased  by  the  article,  may  provide  additional  insights  in  interpret- 
“discouraged”  worker  effect.  ing  labor  market  conditions  since  1969. 
APPENDIX 
EMPLOYMENT  PRESSURE  INDEX 
ECONOMIC  REVIEW, JULY/AUGUST  1975 

On labor market indicators

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