Every month, the Bureau of Labor Statistics (BLS) puts out its jobs report, detailing how many jobs the economy added, the unemployment rate, wage growth, and a variety of other metrics. In this article, we delve into the calculation and significance of these labor force metrics.
Household Survey vs. Establishment Survey
The household survey is called the “Current Population Survey” and is a survey of approximately 60,000 households. Data from this survey is used to categorize adults into Employed, Unemployed, or Not in the Labor Force.
Employed – Employed persons are those that have received a paycheck, are self-employed, or have not worked due to temporary reason such as illness or vacation
Unemployed – Unemployed persons are those that are available to work and have actively seeked employment in the past four weeks
Not in the Labor Force – Persons not counted in the labor force are individuals who are students, retired, homemakers, or otherwise not available or able to work. This category also includes “discouraged workers” who are individuals that are able to work but have given up searching for employment
Based on the above definitions, data from the household survey is used to calculate the following statistics:
Labor Force = Employed Persons + Unemployed Persons
Unemployment Rate = Unemployed Persons / Labor Force
Labor Force Participation Rate = Labor Force / Adult Population
Of these metrics, the unemployment rate is the most widely quoted metric that comes out of the household survey.
The BLS also conducts the establishment or payroll survey, formally known as the “Current Employment Statistics” survey. The establishment survey consists of responses from approximately 150,000 employers, and data from this survey is used in calculating monthly jobs additions, employment hours, average pay, and total employment levels.
The most significant statistic coming out of the establishment survey is the monthly jobs number, which is quoted widely in the financial press. Since 2008, the establishment survey has shown a monthly jobs addition of approximately 150-200k per month. The monthly jobs number is referred to as “non-farm payrolls” due to exclusion of farm workers. The monthly jobs report is released by the BLS on the third Friday of every month at 8:30am.
Monthly Jobs Report – Business Birth / Death Model
Since the establishment survey collects employment data from companies currently in existence, it is difficult for the BLS statisticians to reflect employment created from new business creations (“births”) and to reflect employment reductions from business dissolutions (“deaths”) on a real-time basis. To account for job creation from business births and job loss from business deaths, the BLS has developed the birth-death adjustment. Each month, the birth-death adjustment is added to the job gain/loss number coming from the establishment survey.
In 2017, total non-farm payrolls increased by approximately 2.2mm. Of these 2.2mm jobs added in 2017, the birth-death adjustment accounted for 881k jobs. While the birth-death addition can seem significant, the BLS has shown that the birth-death adjustment has historically resulted in much smaller future revisions of the data vs. not using the birth-death adjustment.
Each year, the BLS adjusts its payroll estimates for the prior year based on data coming out of the Quarterly Census of Employment and Wages (QCEW), which is a near complete accounting of jobs in the United States. The final adjustments to the data have historically been smaller with the birth-death than adjustment than without it, which gives users of the monthly jobs data confidence that the birth-death adjustment is reasonably accurate in its estimation of job growth.
Historical Trends in the Labor Force Participation and Unemployment Rate
Labor Force Participation Rate
The above chart shows labor force participation in the US since 1948. You can see from this chart that labor force participation increased steadily from the mid-1960s and peaked in the mid-1990s. This increase in labor force participation was driven primarily by women entering the labor force in increasing numbers.
However, starting around the year 2000, the labor force participation rate has been gradually declining. The decreasing labor force participation rate has been primarily due to the aging demographics of the United States. Since retirees are not counted as being part of the labor force, increasing numbers of retirees will likely hold down labor force participation.
The above chart shows the unemployment rate in the United States since 1948. The unemployment rate spike to 10% following the 2008 financial crisis but has steadily declined to 3.7% as of September 2018.