I have very little time today but there was one question I get asked on a regular basis that I thought I would this space to quickly answer. People wonder who the participation rate affects the official measure of unemployment. For example, the UK Office of National Statistics released data yesterday (March 15, 2022) – Labour market overview, UK: March 2022 – which showed the official unemployment rate had fallen to 3.9 per cent – a decline of 0.2 points. They said this was the result of employment rising by 275,000 in February (the employment to population ratio rose by 0.1 points). They also said that the inactivity rate for those between 16 and 64) had risen by 0.1 points to 21.3 points and was 1.1 points above the pre-pandemic level. So the question I get asked is whether things are really getting better? So here is how it works.
Does a falling unemployment rate always signal good times?
The answer is no.
To explain that you need to understand how the labour force framework is organised.
The Labour Force Framework constitutes a set of definitions and conventions that allow the national statisticians to collect data and produce statistics about the labour market.
These statistics include employment, unemployment, economic inactivity, and underemployment, which can be combined with other survey data covering for example, job vacancies, earnings, trade union membership, industrial disputes and productivity to provide a comprehensive picture of the way the labour market is performing.
The Labour Force Framework is a classification system, governed by a set of rules and categories.
It forms the foundation for cross country comparisons of labour market data.
The framework is made operational through the International Labour Organization (ILO) and its International Conference of Labour Statisticians (ICLS).
These conferences and expert meetings develop the guidelines or norms for implementing the labour force framework and generating the national labour force data.
There is no conspiracy involved in the compilation of these statistics. One just needs to understand the different definitions to fully appreciate what each number means.
The rules contained within the labour force framework have the following features:
- an activity principle, which is used to classify the population into one of the three basic categories namely; employed, unemployed and not in the labour force.
- a set of priority rules, which ensure that each person is classified into only one of the three categories.
- a short reference period to reflect the labour supply situation at a specified moment in time.
The priority rules are applied to ensure that labour force activities take precedence over non labour force activities and working or having a job (employment) takes precedence over looking for work (unemployment).
Also, as with most statistical measurements of activity, employment in the informal sectors, or the black market economy, is outside the scope of activity measures.
Some definitions and concepts:
1. The Working Age Population (WAP) typically refers to all citizens above 15 years of age. In several countries, the lower age threshold is 16 years of age.
2. The WAP is then decomposed into the Labour Force (the ‘active’ component) and Not in the Labour Force (the ‘inactive’ component). A worker is considered to be active if they are employed or unemployed.
3. The proportion of the adult population who comprise the labour force is governed by the Labour Force Participation Rate.
4. To be classified as employed a person has to work one or more hours per week.
5. To be classified as unemployed a person must be currently available for work and are actively seeking work. Two criteria here.
6. Unemployment is therefore defined as the difference between employment and the economically active population (civilian labour force).
7. The Unemployment rate is the number of unemployed persons as a percentage of the civilian labour force.
8. We know that the participation rate varies over the cycle – when employment opportunities are strong, participation rises and vice versa.
9. That means that in bad times there is likely to be some workers who would be willing to take job offers if they were made, but who have stopped looking for work and are classified by the national statistician as being not in the labour force. These workers who are discouraged from job search by the apparent lack of job opportunities, are classified as being Hidden unemployed.
10. From the perspective of availability, these workers are no different to the officially recorded unemployed. If a job offer was made to them they would take it promptly.
11. This suggests that in bad times, the official unemployment rate understates the ‘true’ underlying unemployment rate in the economy, due to the lower rate of labour force participation.
So that is what we want to show using the official data released yesterday by the ONS.
The ONS publish the ‘inactivity rate’, which they define as:
People not in employment who have not been seeking work within the last 4 weeks and/or are unable to start work within the next 2 weeks.
The inactivity rate is thus proportion of the population that is not in the labour force.
And so the inactivity rate and the participation rate are clearly related because they sum to 100 per cent.
The ONS says that:
Since comparable records began in 1971, the economic inactivity rate has generally been falling; however, it increased during the coronavirus (COVID-19) pandemic.
The ONS stated that the inactivity rate is 1.1 points above its pre-pandemic level.
The peak participation rate (I prefer to think in those terms) was 64.3 per cent in the three-months December-February 2020.
It is now at 63.2 per cent.
What would the unemployment rate be now, given employment growth, if the participation rate had not fallen (inactivity risen)?
The labour force is a subset of the working-age population (those above 15 years old). The proportion of the working-age population that constitutes the labour force is called the labour force participation rate. Thus changes in the labour force can impact on the official unemployment rate, and, as a result, movements in the latter need to be interpreted carefully. A rising unemployment rate may not indicate a recessing economy.
The labour force can expand as a result of general population growth and/or increases in the labour force participation rates.
The calculations are shown in the following table as at the November-January 2022 period:
|Population over 16 yearss||53,584|
|Potential Labour Force||34,462|
|Official Unemployment Rate||3.9|
|Adjusted Unemployment Rate||5.6|
1. The potential labour force is the WAP times the peak participation rate (so 53,584 times 64.3 per cent).
2. Hidden unemployment is the Potential labour force minus the actual labour force.
3. Adjusted unemployment adds hidden unemployment to the official unemployment measure.
4. Adjusted unemployment rate is 100 times the adjusted unemployment divided by the potential labour force.
So if the participation rate (inactivity rate) was at its pre-pandemic level, then the current unemployment rate would be 5.6 per cent rather than the current official rate of 3.9 per cent.
Quite a difference.
Music – My Foolish Heart
This is what I have been listening to while working this morning.
It was criticised heavily (both the song and film) for being too sentimental. Just the sort of song I like it appears.
I first heard it played by the incomparable – Billy Eckstine – who was a favourite of my parents, although I would have feigned disapproval of him at the time (childhood).
The album I purchased – Waltz for Debby (released in 1962) – included this version of the song.
This was a live album recorded by – Bill Evans – with his trio comprising:
1. Bill Evans – piano.
2. Scott LaFaro – bass.
3. Paul Motian – drumms.
This is the best jazz band of all time (in my view).
He had escaped the dominance of Miles Davis in 1959 (the modal jazz era) and his short-lived trio played some of the best music ever.
The bass player died soon after in a car accident.
The band recorded 4 albums in total – all worth listening to often.
4:55 of pure joy.
That is enough for today!
(c) Copyright 2022 William Mitchell. All Rights Reserved.