by Calculated Risk on 2/04/2011 12:38:00 PM

FAQ: How can the unemployment rate fall sharply if the economy is adding so few jobs, especially since the population is growing?

This data comes from two separate surveys. The unemployment rate comes from the Current Population Survey (CPS: commonly called the household survey), a monthly survey of about 60,000 households. The payroll jobs number comes from Current Employment Statistics (CES: establishment survey), a sample of approximately “140,000 businesses and government agencies representing approximately 410,000 worksites”.

These are very different surveys: the CPS gives the total number of employed (and unemployed including the alternative measures), and the CES gives the total number of positions (excluding some categories like the self-employed, and a person working two jobs counts as two positions).

A couple of key concepts (from the BLS):

The CES employment series are estimates of nonfarm wage and salary jobs, not an estimate of employed persons; an individual with two jobs is counted twice by the payroll survey. The CES employment series excludes employees in agriculture and private households and the self-employed.

And the CPS:

The CPS estimate of employment is for the total number of employed persons. Included are categories of workers that are not covered by the Current Employment Statistics (CES) survey: self-employed persons, private household workers, agriculture workers, unpaid family workers, and workers on leave without pay during the reference period. Multiple jobholders are counted once in the estimate of total employed.

Unemployed persons include those who did not have a job during the reference week, had actively looked for work in the prior 4 weeks, and were available for work. Actively looking for work includes activities such as contacting a possible employer, contacting an employment agency or employment center, having a job interview, sending out resumes, filling out job applications, placing or answering job advertisements, and checking union or professional registers.

In January the headline CES number showed a gain of 36,000 non-farm jobs (by the definitions above). The CPS showed an increase of 117,000 employed people.

These two surveys are almost always different, and both are useful for understanding the employment situation.

Q: But the unemployment rate fell sharply even though the CPS only showed an increase of 117,000 employed people. How can that be?

The unemployment rate declined to 9.0% in January from 9.4% in December. The unemployment rate comes from directly from the CPS survey, but we can also think of it in terms of change in the labor force, and changes in the number of unemployed people. The unemployment rate is a ratio, with the numerator the number of unemployed, and the denominator the Civilian Labor Force - so the following changes lowered the unemployment rate to 9.0%.

The CPS also showed a decline in the Civilian Labor Force Level by 504,000. Some of this decline was due to a lower participation rate, and some of this decline was due a lower estimate of the Civilian noninstitutional population. In reality the working age population probably increased in January, but the updated population estimate showed a decrease of 185,000 people in the month.

The BLS provides some estimates with and without the change in population control (see Table C. at bottom of the release). Without the change in population control, the CPS would have shown an increase of 589,000 employed people. Also, without the change in population control, the number of unemployed would have fallen 590,000 (U-3). With the update population estimate, the number of unemployed declined 622,000.

So without the change in the population control - the change can be confusing - the CPS showed a surge in employment and a sharp decline in the unemployed, and that is the reason the unemployment rate declined sharply.

If you want more details, see Monthly Employment Situation Report: Quick Guide to Methods and Measurement Issues

Although the CPS showed the labor force declined in January, over time the labor force will continue to grow - probably around 1.5 to 2.0 million people per year on average, and the CES will probably need to show the addition of around 125,000 jobs per month just to keep the unemployment rate steady (estimates vary of this number).

Also weather usually has a bigger impact on the CES (establishment survey) than the CPS (household survey). We saw this last February when the CES showed a decline in payroll jobs and CPS showed an increase in the number employed and the unemployment rate held steady. Here is the archived February 2010 release. In the following month, March of 2010, the CES showed a relatively large increase in payroll jobs ex-Census (considering the weak labor market), and it was best to average the two reports together.

If the weak payroll report in January was due to the impact of weather we should expect a boost in the February payroll report and average the two together. If the underlying trend is around 150,000 payroll jobs per month, we'd expect to see 300,000 additional payroll jobs when we combine the January and February payroll reports next month.

So remember the jobs and unemployment rate come from two different surveys and they are different measurements of the employment situation (one for positions, the other for people). Some months the numbers may not seem to make sense (few payroll jobs and a sharp decline in the unemployment rate), but over time the numbers will work out.

Here are the earlier employment posts (with graphs):
• January Employment Report: 36,000 Jobs, 9.0% Unemployment Rate
• Employment Summary and Part Time Workers, Unemployed over 26 Weeks
• Employment Graph Gallery