Reader Question Regarding "Dropping Out of the Workforce"; Implications of the Falling Participation Rate

In response to BLS Job Report: December Nonfarm Payrolls +103,000, November Revision +32,000, October Revision +38,000; Workforce DROPS by 260,000, reader "Aleph" wants to know how someone drops out of the workforce.

Aleph writes ...

Hello Mish

Can you explain to your readership how the government determines that a person has dropped out of the labor force, as opposed to running out of unemployment benefits and becoming desperate (or homeless) with no job and no decent prospects? Or do they make no distinction between voluntarily leaving the work force and involuntarily leaving it?

"Dropping out" sounds much less dire than being unemployed because there aren't enough jobs to go around.

Thanks,

Aleph

Ways of Dropping Out

Hello Aleph, someone drops out of the workforce in one four general ways.

1. They stop looking for work
2. They retire
3. They go back to school full time and are unavailable for work
4. They are institutionalized (prison for example)

The big numbers come from 1, 2, and 3 with #1 leading the pack.

If a person wants a job, is available for a job and keeps looking for a job, that person is unemployed. I suspect most retirees, stop looking.

Note that number 2 may be voluntary or involuntary. An example of an involuntary retirement is someone who wants work to work but retires because he has expired all his 99 weeks of benefits and desperately needs to start collecting social security before he goes homeless.

All of this is determined by a phone survey. The BLS attempts to determine the following

1. Are you employed full time?
2. Are you employed part time?
3. Do you want a job?
4. Are you available for a job?
5. Have you looked for a job in the last four weeks?

• A Yes to #1 or #2, no matter how few hours someone worked (exceptions apply for unpaid family workers) puts someone in the "EMPLOYED" category.
• A No to #3, #4 (except for temporary illness), or #5 would put someone in the "NOT IN THE WORKFORCE" category.
• A No to #1 and #2, and a Yes to #3, #4 (except for temporary illness), and #5 puts someone in the "UNEMPLOYED" category.
• Those employed or unemployed are considered "IN THE WORKFORCE"

However, the BLS does not ask those questions directly. Rather the phone interview attempts to figure the answers to those questions.

How the Government Measures Unemployment

Please consider How the Government Measures Unemployment

There are about 60,000 households in the sample for this survey. This translates into approximately 110,000 individuals, a large sample compared to public opinion surveys which usually cover fewer than 2,000 people. The CPS sample is selected so as to be representative of the entire population of the United States.

Every month, one-fourth of the households in the sample are changed, so that no household is interviewed more than 4 consecutive months. This practice avoids placing too heavy a burden on the households selected for the sample. After a household is interviewed for 4 consecutive months, it leaves the sample for 8 months, and then is again interviewed for the same 4 calendar months a year later, before leaving the sample for good. This procedure results in approximately 75 percent of the sample remaining the same from month to month and 50 percent from year to year.

Each month, 2,200 highly trained and experienced Census Bureau employees interview persons in the 60,000 sample households for information on the labor force activities (jobholding and jobseeking) or non-labor force status of the members of these households during the survey reference week (usually the week that includes the 12th of the month). At the time of the first enumeration of a household, the interviewer prepares a roster of the household members, including their personal characteristics (date of birth, sex, race, Hispanic ethnicity, marital status, educational attainment, veteran status, and so on) and their relationships to the person maintaining the household.

Each person is classified according to the activities he or she engaged in during the reference week. Then, the total numbers are "weighted," or adjusted to independent population estimates (based on updated decennial census results). The weighting takes into account the age, sex, race, Hispanic ethnicity, and State of residence of the person, so that these characteristics are reflected in the proper proportions in the final estimates.

Because these interviews are the basic source of data for total unemployment, information must be factual and correct. Respondents are never asked specifically if they are unemployed, nor are they given an opportunity to decide their own labor force status. Unless they already know how the Government defines unemployment, many of them may not be sure of their actual classification when the interview is completed.

Similarly, interviewers do not decide the respondents' labor force classification. They simply ask the questions in the prescribed way and record the answers. Based on information collected in the survey and definitions programmed into the computer, individuals are then classified as employed, unemployed, or not in the labor force.

What are the basic concepts of employment and unemployment?

The basic concepts involved in identifying the employed and unemployed are quite simple:

• People with jobs are employed.
• People who are jobless, looking for jobs, and available for work are unemployed.
• People who are neither employed nor unemployed are not in the labor force.

Unpaid Family Workers

But what about the two following cases?

• George Lewis is 16 years old, and he has no job from which he receives any pay or profit. However, George does help with the regular chores around his father's farm and spends about 20 hours each week doing so.
• Lisa Fox spends most of her time taking care of her home and children, but she helps in her husband's computer software store all day Friday and Saturday.

Under the Government's definition of employment, both George and Lisa are considered employed. They fall into a group called "unpaid family workers," which includes any person who worked without pay for 15 hours or more per week in a family-owned enterprise operated by someone in their household.

Interview Questions

The questions used in the interviews are carefully designed to elicit the most accurate picture of each person's labor force activities. Some of the major questions that determine employment status are: (The capitalized words are emphasized when read by the interviewers.)

1. Does anyone in this household have a business or a farm?
2. LAST WEEK, did you do ANY work for (either) pay (or profit)?
If the answer to question 1 is "yes" and the answer to question 2 is "no," the next question is:
3. LAST WEEK, did you do any unpaid work in the family business or farm?
For those who reply "no" to both questions 2 and 3, the next key questions used to determine employment status are:
4. LAST WEEK, (in addition to the business,) did you have a job, either full or part time? Include any job from which you were temporarily absent.
5. LAST WEEK, were you on layoff from a job?
6. What was the main reason you were absent from work LAST WEEK?
For those who respond "yes" to question 5 about being on layoff, the following questions are asked:
7. Has your employer given you a date to return to work?
and, if "no,"
8. Have you been given any indication that you will be recalled to work within the next 6 months?
If the responses to either question 7 or 8 indicate that the person expects to be recalled from layoff, he or she is counted as unemployed. For those who were reported as having no job or business from which they were absent or on layoff, the next question is:
9. Have you been doing anything to find work during the last 4 weeks?
For those who say "yes," the next question is:
10. What are all of the things you have done to find work during the last 4 weeks?
If an active method of looking for work, such as those listed at the beginning of this section, is mentioned, the following question is asked:
11. LAST WEEK, could you have started a job if one had been offered?
If there is no reason, except temporary illness, that the person could not take a job, he or she is considered to be not only looking but also available for work and is counted as unemployed.

Who is not in the labor force?

Labor force measures are based on the civilian noninstitutional population 16 years old and over. Excluded are persons under 16 years of age, all persons confined to institutions such as nursing homes and prisons, and persons on active duty in the Armed Forces. As mentioned previously, the labor force is made up of the employed and the unemployed. The remainder—those who have no job and are not looking for one—are counted as "not in the labor force." Many who are not in the labor force are going to school or are retired. Family responsibilities keep others out of the labor force.

To summarize, employed persons are:

• All persons who did any work for pay or profit during the survey week.
• All persons who did at least 15 hours of unpaid work in a family-owned enterprise operated by someone in their household.
• All persons who were temporarily absent from their regular jobs because of illness, vacation, bad weather, industrial dispute, or various personal reasons, whether or not they were paid for the time off.

Unemployed persons are:

• All persons who did not have a job at all during the survey reference week, made at least one specific active effort to find a job during the prior 4 weeks, and were available for work (unless temporarily ill).
• All persons who were not working and were waiting to be called back to a job from which they had been laid off (they need not be looking for work to be classified as unemployed). -
  

One More Exception

Based on an example in the article, those out of work because of a labor dispute are considered employed even if they are looking for another job during the dispute.

Finally, please note that the official unemployment rate is solely based on the household phone survey as described above. It may not bear any resemblance to the weekly unemployment claims numbers or the monthly establishment jobs report.

Participation Rate, Employment Population Ratio, and Unemployment



click on chart for sharper image

The above chart from The Declining Participation Rate by Calculated Risk.

The falling participation rate reflects the number of people dropping out of the workforce. It is falling for two reasons. People have given up looking for a job and also because of demographics (people retiring as the boomer population ages). The predominant reason is people have stopped looking for a job.

Here are my posts on Creative Destruction, referenced in the chart above.

• Creative Destruction
• Creative Destruction And The Rising Tide of IT Pay Cuts

The workforce should be expanding by 100,000 to 125,000 jobs a month. Instead it is falling like a rock. This is a very deflationary event. It stops credit expansion, and it reflects retirees needing to draw down on their savings, pulling money out of the stock market.

Stock market pressures are negative when people need to get out or they fear further loses in their retirement accounts.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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