Commerce Lexington

So if you read my previous post, you were witness to a little careless analysis on my part regarding the reasons for the larger than average drop in the unemployment rate between August and September. My theory was that due to to a larger than average drop in the labor force, there was a possibility that discouraged workers might have been a real factor in the drop in the unemployment rate. This would make the drop a little artificial – an artifact of the methodology and not necessarily a good sign.

While I try very hard not to explicitly link data to real-world conditions (correlation does not imply causation), it is still sloppy because I was only looking at the denominator in the equation, not the numerator. If there were simply a drop in the labor force, it would have made unemployment go up, not down. Let’s take a little deeper look at what constitutes the unemployment rate.

The unemployment number reported monthly is from the LAUS or Local Area Unemployment Statistics. It is an offshoot of the CPS or Current Population Survey. The CPS essentially functions to place people into one of three groups on a monthly basis. So for the civilian (i.e., non-military) non-institutionalized (i.e., non-incarcerated/committed) population, you can be either employed, unemployed, or not in the labor force.

Employed means that during the week that includes the 12th day of the month being surveyed, you did any work as a paid employee, worked in your own business or on your farm, or worked 15 hours or more as an unpaid worker in a family business. You also qualify as being employed if you were temporarily absent because of vacation, illness, bad weather, childcare problems, maternity or paternity leave, labor-management dispute job training, or other family or personal reasons, whether or not you were paid for the time off or were seeking other jobs. Oh, and if you have more than one job, you only have to be employed at one of them to count.

Many people assume that the remainder of people who aren’t employed are classified as unemployed. But to be counted as unemployed, you have to, of course, not be employed, not be on disability, and you have to have been specifically looking for work at some point during previous month. For clarification, if you have been laid off and are awaiting a recall to that job, you don’t have to look for work in order to be counted in the unemployed group. If you think about it, these conditions eliminate kids (who can’t look for work legally), a lot of older people (who aren’t looking for work), and a great deal of students (specifically, the ones that aren’t looking for work or employed while in school).

If you are neither employed nor unemployed according to the above definitions, then you just don’t exist in the unemployment rate. It is that simple. The number of employed people gets added to the number of people who are unemployed. This sum is the total labor force. The unemployment rate is the simple division of the number of unemployed by the total labor force.

So the kicker is: if someone drops out of the unemployed group for anything other than getting a job, then they will also drop out of the labor force total as well. This has the effect of taking one person out of the numerator and denominator of the unemployment rate calculation, which has no discernable effect on the first few decimal places unless it is seriously happening en masse.

So, for example, when the unemployment rate in Fayette County dropped from 8.2% in August to 7.7% in September this year, we can assume that the drop was partially seasonal (it is, Fayette County has averaged a .2% drop at this time every year in this decade), but also that any other positive effects could actually be more people moving from the unemployed to the employed category and not just discouraged workers. As always, one month is never enough of a time period to evaluate the economy as a whole, but I have my fingers crossed for more positive news in the future.