I have very little time today, but I’m often asked a question that I thought I’d answer quickly in this space. One wonders who’s participation rate affects the official measure of unemployment. For example, data released by the UK Office for National Statistics yesterday (15 March 2022) – UK Labour Market Overview: March 2022 – This shows that the official unemployment rate has fallen to 3.9% – a drop of 0.2 percentage points. They said it was the result of a 275,000 increase in employment in February (the employment-to-population ratio rose 0.1 percentage points). They also said the inactivity rate for 16- to 64-year-olds rose by 0.1 percentage points to 21.3 percentage points, 1.1 percentage points higher than pre-pandemic levels. So the question I was asked was, is it really getting better? This is how it works.
Does falling unemployment always herald good times?
The answer is no.
To explain, you need to understand how the workforce framework is organized.
The Labour Framework constitutes a set of definitions and conventions that allow national statisticians to collect data and produce statistics on the labour market.
These statistics, which include employment, unemployment, economic inactivity and underemployment, can be combined with other survey data such as job vacancies, earnings, union membership, labor disputes and productivity to get a complete picture of how the labor market is performing.
The workforce framework is a classification system governed by a set of rules and categories.
It provides the basis for cross-country comparisons of labor market data.
The framework is implemented through the International Labour Organization (ILO) and its International Conference of Labour Statisticians (ICLS).
These meetings and expert meetings develop guidelines or norms for implementing the workforce framework and generating national workforce data.
No conspiracy is involved in the compilation of these statistics. One only needs to understand the different definitions to fully understand what each number means.
The rules contained within the workforce framework have the following characteristics:
- Activity principle, used to classify the population into one of three basic categories; employed, unemployed and not in the labor force.
- A set of priority rules to ensure that each person is only classified into one of the three categories.
- A short reference period that reflects the labor supply situation at a specific point in time.
The priority rule is applied to ensure that labor activity takes precedence over non-labor activity, and that working or having a job (employment) takes precedence over looking for a job (unemployment).
Furthermore, as with most statistical measures of activity, employment in the informal sector or the black market economy is not included in the measure of activity.
Some definitions and concepts:
1. working age population (WAP) generally refers to all citizens over the age of 15. In some countries, the lower age threshold is 16.
2. Then decompose the WAP into labor force (the “activity” component) and not in the workforce (“inactive” component).A worker is considered active if they are employed or unemployed.
3. The proportion of the adult population that makes up the workforce is given by labor force participation rate.
4. A person must work one or more hours per week to be classified as employed.
5. To be classified as unemployed, a person must be currently available and actively looking for work. There are two criteria here.
6. Unemployment is therefore defined as the difference between the number of employed persons and the economically active population (civilian labor force).
7. unemployment rate is the unemployed as a percentage of the civilian workforce.
8. We know that participation rates change with cycles – when jobs are strong, participation rates go up and vice versa.
9. This means that in times of economic downturn there may be some workers who are willing to accept job offers but who have stopped looking for work and are classified as not in the workforce by the national statistician.These workers who are reluctant to apply for jobs due to an apparent lack of job opportunities are classified as hidden unemployed.
10. From an availability standpoint, these workers are no different from the officially recorded unemployed. If offered a job offer to them, they would immediately accept it.
11. This suggests that the official unemployment rate understates the “true” potential unemployment rate in the economy due to the low labor force participation rate.
That’s what we want to show using the official data that ONS released yesterday.
The ONS publishes an “inactivity rate,” which they define as:
Unemployed persons who have not looked for work in the past 4 weeks and/or are unable to start work in the next 2 weeks.
Therefore, the inactivity rate is the proportion of the population that is not in the labor force.
Therefore, inactivity and engagement rates are clearly correlated because they add up to 100%.
ONS said:
Economic inactivity has generally declined since comparable records began in 1971; however, it has increased during the coronavirus (COVID-19) pandemic.
data
The ONS said the inactivity rate was 1.1 percentage points higher than pre-pandemic levels.
In the three months from December to February 2020, the highest engagement rate (which I prefer to think of this way) was 64.3%.
It is now 63.2%.
Given job growth, what would the unemployment rate be now if the participation rate hadn’t fallen (inactivity increased)?
The labor force is a subset of the working-age population (15+). The proportion of the working-age population that makes up the labor force is called the labor force participation rate. Therefore, changes in the labor force affect the official unemployment rate, and therefore, changes in the latter need to be carefully explained. Rising unemployment may not mean a recession.
The workforce is likely to expand due to overall population growth and/or higher labor force participation rates.
The table below shows the calculations for the period from November 2022 to January 2022:
| total | 000s | percentage |
| Population over 16 years old | 53,584 | |
| labor force | 33,862 | |
| potential workforce | 34,462 | |
| hidden unemployed | 600 | |
| official unemployment | 1,321 | |
| Adjusted Unemployment Rate | 1,921 | |
| official unemployment rate | 3.9 | |
| Adjusted Unemployment Rate | 5.6 |
notes:
1. Potential workforce is WAP times peak participation rate (ie, 53,584 times 64.3%).
2. Hidden unemployment is the potential labor force minus the actual labor force.
3. The adjusted unemployment rate adds hidden unemployment to the official unemployment index.
4. The adjusted unemployment rate is the adjusted unemployment rate divided by 100 times the potential labor force.
So, if the participation rate (inactivity rate) was at pre-pandemic levels, the current unemployment rate would be 5.6% instead of the current official unemployment rate of 3.9%.
very different.
music – my stupid heart
Here’s what I’ve been listening to this morning at work.
This song – my stupid heart – is the jazz standard, originally created by – Martha Mills The 1949 film of the same name.
It was heavily criticized (song and movie) for being too sentimental. It’s the kind of song I like.
The first time I heard it was by the incomparable— Billy Eckstein – He was my parents’ favorite, even though I would pretend to disapprove of him at the time (childhood).
Albums I bought – Debbie’s Waltz (released in 1962) – Includes this version of the song.
It’s a live album by— Bill Evans – His trio consists of:
1. Bill Evans – piano.
2. Scott Rafalo – Bass.
3. Paul Mortian – drum.
This is the best jazz band of all time (in my opinion).
He broke away from Miles Davis in 1959 (the Modal Jazz Age), and his short-lived trio played some of the best music ever.
The bassist died in a car accident shortly after.
The band recorded a total of 4 albums – all worth listening to regularly.
4:55 Pure joy.
Enough for today!
(c) Copyright 2022 William Mitchell. all rights reserved.
