Annual Report 2010| Federal Reserve Bank of St. Louis

3. Unemployment

According to Figure 1, about 40 percent of the U.S. adult population is "jobless" at any point in time. Joblessness (nonemployment), however, is not the same thing as unemployment, at least according to standard labor force survey definitions. To be classified as unemployed, a nonemployed person must report being available for paid work and having engaged in some job search activity in the previous four weeks.2 Nonemployed persons who are not actively looking for jobs are classified as nonparticipants.

Conceptually, the distinction between unemployment and nonparticipation is clear enough; it involves some notion of active job search. The standard labor force survey asks nonemployed people what they have done to find work (in the previous four weeks). If the respondents answer "nothing," then they are classified as nonparticipants. Almost any evidence of active job seeking warrants classification as unemployed.3 It is important to understand that these classifications are determined by the surveyor. The people being surveyed are never asked directly whether they are unemployed or not.

From an economic perspective, then, a nonemployed person who had one job interview in four weeks may not look that much different from a nonparticipant. Indeed, our clean conceptual distinctions are clouded further by the fact that in any given month, the number of nonparticipants who find jobs is as large as the number of unemployed who do.

On the other hand, the data show that an unemployed person is more likely to find a job than a nonparticipant. This difference in the probability of finding a job suggests that the unemployed are in some sense "more attached" to the labor market than nonparticipants are. It is for this reason that the labor force is defined to be the sum of employment and unemployment. The implication is that nonparticipants are "not in the labor force."

When a recession hits, the unemployment rate typically spikes very quickly and sharply. Over the course of the subsequent recovery, however, the unemployment rate typically declines much more gradually. Figure 3 shows this pattern quite clearly for the United States. It evidently takes a lot of time to rebuild the job-worker relationships that are destroyed in a severe recession. If history is any guide, then, one should not expect the U.S. unemployment rate to fall back to pre-recession levels for many years to come.



U.S. Unemployment Rate

1976:Q1 - 2010:Q4

figure 3
SOURCE: Bureau of Labor Statistics/Haver Analytics.

One should keep in mind that unemployment rates, like most measures of labor market activity, often vary significantly across economic and demographic characteristics, such as income, age, sex and education.

Figure 4 depicts the unemployment rates for four educational attainment categories in the U.S. since the year 2000. As one might expect, the incidence of unemployment falls more heavily on the less-educated. A high school dropout, for example, is roughly three times more likely to be unemployed than a college graduate. It is interesting to note, however, that the unemployment rates across all education categories increased at roughly the same proportion during the past recession.


U.S. Unemployment Rates across Education Groups (Ages 25+)

2000:Q1 - 2010:Q4

figure 4

SOURCE: Bureau of Labor Statistics/Haver Analytics.



2. The only exception to this rule is for those on temporary layoff. Only a small fraction of the unemployed fall into this category.

3. If respondents say they have only "looked at want ads," they are also classified as nonparticipants.

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