Annual Report 2010| Federal Reserve Bank of St. Louis

2. Employment

Everyone has a common-sense notion of what it means to be employed. But to measure employment, the concept has to be defined precisely. Doing this is not as straightforward as one might imagine.

We are all given a gift of time: 24 hours a day, 7 days a week, 52 weeks a year and so on. We generally have many competing uses for our time. Deciding how to spend a fixed amount of time across competing uses is a problem familiar to most of us. Some time is devoted to the office, some to the gym, some to household chores and so on. The time "employed" in many of these different activities could rightfully be described as "work." A stay-at-home parent may legitimately be said to have a "job" (and an important one, at that). Going down this path, however, soon leads to the conclusion that almost everyone could be classified as "employed" in the sense of engaging in some productive activity. There may very well be some merit to this point of view.

In everyday language, however, a "job" or "employment" is commonly associated with an activity that generates a monetary reward. This is essentially the way statistical agencies measure employment. Standard labor force surveys record a person as employed in a given month if he or she reports having performed any paid work in the previous four weeks. The term "paid" should be understood here as direct monetary compensation by another party (an employer or, in the case of the self-employed, a customer).

Understanding how employment is defined and measured is important for how its level is interpreted. An increase in employment is usually thought to be a good thing, and, indeed, it frequently is. But employment may also increase when, for example, a student cannot afford to remain in school or when a stay-at-home parent is forced to find a paying job. Clearly, it is not in the interest of society to have everyone employed. But if this is the case, then how is "full employment" to be defined and measured?

The idea that the economy is at full employment when everyone who wants a job has a job is not very helpful. Almost anybody can get some sort of job in relatively short order. The problem for most people is in finding a high-paying job that they enjoy doing. Everybody wants this type of job even if he or she is currently engaged in other productive activities, such as going to school or minding the household. Conceptual difficulties such as these have led some economists to look to the data for guidance. In particular, might it be possible to identify full employment by appealing to some long-run historical average level of employment?



U.S. Employment-Population Ratio

1948:Q1 - 2010:Q4

figure 1 

SOURCE: Bureau of Labor Statistics/Haver Analytics.


Figure 1 plots the evolution of employment in the United States from 1948 to the present. Because employment will grow naturally along with the population, it is sometimes more illuminating to examine the behavior of employment relative to population size. The employment-population ratio recorded in Figure 1 represents employment divided by the relevant population.1

In the postwar era, the U.S. employment rate has averaged about 60 percent and has remained, for the most part, within three percentage points of this average over the sample period. Because the population base is large, a small change in the employment rate can translate into millions of jobs. For example, in the most recent recession, the employment rate declined by more than three percentage points, which corresponds to a decline of almost 8 million jobs.

Figure 1 also reveals an interesting difference in how male and female employment rates have evolved over time. First, while employment rates are lower for females relative to males, this gap has closed significantly over the past 60 years. Male employment rates show a persistent decline in the first half of the sample, while female employment rates are generally on the rise. While these long-run adjustments appear to have stabilized over the past 20 years or so, it remains unclear whether some notion of "full employment" can be identified in this data. If it can, then it would appear to differ across the sexes and fluctuate over time.

Employment rates in different sectors of the economy are also evolving. Figure 2 shows the employment-population ratios for eight sectors; these ratios have been normalized at 100 in the first quarter of 2000. The subsequent points on each curve can then be interpreted as the percentage change in that sector's employment-population ratio since the beginning of 2000.



Evolution of Sectoral Employment

2000:Q1 - 2010:Q4

figure 2 

SOURCE: Bureau of Labor Statistics/Haver Analytics.

If an economy were to grow along what economists call a "balanced growth path," then all of the lines in Figure 2 could be expected to fluctuate around the normalized value of 100. But there appear to be clear trends in at least two sectors: Manufacturing sector employment is in long-run decline, while employment in the education and health services sector is steadily on the rise—even through the most recent recession. In terms of cyclicality, there is no surprise. To take two extremes, construction sector employment is highly cyclical, while government sector employment is not.


1. Population is civilian noninstitutional ages 16+.

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