After talking about unemployment last week, I thought I should explain more about how and why the government calculates these numbers every month. As outlined in a blog post on wsj.com, there are several misconceptions regarding unemployment.
The unemployment rate is a very important number.A high unemployment rate indicates a loss of productivity in a country and suffering at an individual level. These numbers often are used to decide if measures should be taken to influence the economy or help the unemployed. After disappointing numbers were released on Friday of last week, talk has re-emerged of further “quantitative easing,” which is a monetary policy used by central banks to stimulate the economy.
The Bureau of Labor Statistic (BLS) of the U.S. Department of Labor releases this number every month. It receives a great deal of coverage in the media, but the majority of us do not understand exactly how this system works. Among these misconceptions are beliefs that every household is somehow contacted to receive an exact count for unemployment or that unemployment insurance records are used. Neither of these are the case for several reasons, amongst them are time, financial costs and the fact that individuals can only draw unemployment for a certain amount of time.
So how do they calculate the unemployment rate then? The government conducts a sample survey called the Current Population Survey (CPS). This form of measure began in 1940 and has been modified several times. It covers approximately 60,000 households or 110,000 individuals each month.
According to the BLS website, “The CPS sample is selected so as to be representative of the entire population of the United States.” All counties and county-equivalent cities are grouped into 2,025 sampling units with 824 of these units being chosen by the Census Bureau to represent each state and the District of Columbia.
Each month, one-fourth of the households in the sample are changed so that no household is interviewed more than four consecutive months. The Census Bureau has 2,200 employees conduct interviews of persons in the sample households every month.
When a household is first interviewed, the interviewer prepares a roster of the household members; their personal characteristics such as race, sex, and date of birth and their relationships to the person maintaining the household. This information, relating to members 15 years of age or older, is then transmitted to the Bureau’s main computer in Washington, D.C.
Classification is made in regards to the activities the person is engaged in during the reference week. These numbers are then “weighted” or adjusted to independent population estimates that are based on updated decennial census results. This weighting accounts for the age, sex, race, Hispanic ethnicity and state of residence of the person. This weighting helps ensure that these characteristic are represented in the proper proportions in the final estimates.
“Chances are 90 out of 100 that the monthly estimate of unemployment from the sample is within about 290,000 of the figure obtainable from a total census,” the BLS website claims. “Because these interviews are the basic source of data for total unemployment, information must be factual and correct.”
The survey respondents never are asked specifically if they are unemployed or given an opportunity to decide their own labor force status.
Individuals are classified as employed, unemployed or not in the labor force based on the questions they answer in the survey that is processed through the Bureau’s definitions programmed into their computer.
So who is counted as employed? Individuals are considered employed if they do any work for pay during the survey week. This can be part-time, full-time or temporary work. They also are counted if they have a job but were not there during the survey week because they were on vacation, ill, experiencing child care problems, taking care of family, on maternity leave, involved in an industrial dispute or prevented from working by bad weather.
Who is unemployed? Individuals are classified as unemployed if they do not have a job, have actively looked for work in the prior four weeks and are currently available for work. Actively looking for work is classified by contacting: an employer directly or having a job interview, a public or private employment agency, friends or relatives, a school or university employment center, sending out résumés or filling out applications, placing or answering advertisements, checking union or professional registers or some other means of active job search.
Passive methods do not qualify as actively searching for jobs. Activities that are considered passive are attending a job training program or just reading about openings and not applying for them. Workers that are expecting to be recalled from temporary layoff also are counted as unemployed.
There are also seasonal adjustments to account for hiring and layoff patterns. This technique takes past history of the series to identify seasonal movements and calculate the size and direction of these movements. The seasonal adjustment factor is then developed and applied to the estimates to eliminate the effects of regular seasonal fluctuations.
All of this data can be found in a monthly news release by BLS titled “The Employment Situation.”