Purdue Measuring Labor Utilization The Non Employment Index Marianna Kudlyak. “Measuring Labor Utilization: The Non-Employment Index,” FRBSF Economic Lette

Purdue Measuring Labor Utilization The Non Employment Index Marianna Kudlyak. “Measuring Labor Utilization: The Non-Employment Index,” FRBSF Economic Letter March 27, 2017.In the summary, please try to capture the essence of the article (for example, what is the objective of the paper, data and methodology employed, major finding and conclusions of the paper, AND ANY LIMITATION(S) OF THE STUDY OR WAYS YOU THINK THE PAPER CAN BE IMPROVED).How long should the summary be? A maximum of 2 pages long, using Times New Roman, 12 font size, 1 inch margins, 1.5 or double spaced. FRBSF Economic Letter
2017-08 | March 27, 2017 | Research from the Federal Reserve Bank of San Francisco
Measuring Labor Utilization: The Non-Employment Index
Marianna Kudlyak
The elevated number of non-employed people who are out of the labor force has raised
some concerns about how well the headline unemployment rate measures available labor.
An alternative measure of labor utilization, the Non-Employment Index, accounts for all nonemployed individuals, distinguishing between groups like short-term versus long-term
unemployed, discouraged workers, retirees, and disabled individuals, and adjusting for how
likely each is to transition to employment. Current data show the index is very close to its
value in 2005–06, the period near the peak of the previous economic expansion.
Since the 2007–09 recession, the U.S. unemployment rate has declined from a high of 10.0% to 4.7% in
February 2017. During the same period, the share of the population that reported not working and not actively
looking for work grew from 35% to 37%, continuing its increase since 2000. Many of those who are out of the
labor force are retired, disabled, or in school and have low probability of transitioning to work. However, the
probability is not zero, and this group constitutes a large majority of all the non-employed. In fact, on average,
every month more than twice as many individuals transition to employment from outside of the labor force than
do from unemployment (Kudlyak and Lange 2014). The increase in the number of individuals joining the
workforce from this group and the possibility that they represent an additional source of labor availability have
raised questions about the accuracy of the unemployment rate as a gauge of underutilized labor resources.
In this Letter, I describe the Non-Employment Index (NEI) developed by Hornstein, Kudlyak, and Lange (2014),
available at https://www.richmondfed.org/research/national_economy/non_employment_index. The index is
an alternative measure of resource underutilization in the labor market that takes into account the different job
finding rates of all non-employed individuals, not just the active job seekers who are counted as officially
unemployed. Similar to the unemployment rate, the NEI increases during recessions and falls during recoveries.
In 2016 and the beginning of 2017, the NEI has been hovering very close to its level in 2005–06, a year before
the most recent business cycle peak. Consequently, this broader measure of labor resources tells a story similar
to the unemployment rate—that the U.S. labor market has returned to full health.
Differing employment probabilities among the non-employed
The primary source of labor force statistics for the U.S. population is the Current Population Survey, jointly
sponsored by the U.S. Census Bureau and the Bureau of Labor Statistics (BLS). Every month the survey compiles
information on the shares of employed, unemployed, and those out of the labor force (OLF) in the civilian noninstitutionalized population. Individuals who report actively looking for a job or are laid off and waiting to
return to work are classified as unemployed; the rest of the non-employed are counted as OLF.
FRBSF Economic Letter 2017-08
March 27, 2017
In the survey, people who are out of the labor force are asked a sequence of questions designed to determine
their labor force attachment—that is, their interest in obtaining a job at some point. Specifically, non-employed
individuals who are not actively looking for work are asked whether they currently want a job. If someone
indicates wanting a job, the person is asked about the main reason for not looking for work and about search
behavior in the past 12 months.
Based on the responses to these questions, OLF individuals can be classified into seven categories. Two are
considered marginally attached, referring to non-employed individuals who want a job, are available for work,
and have looked for a job sometime in the prior 12 months, but were not counted as unemployed because they
had not searched for work in the four weeks preceding the survey. Among the marginally attached are
discouraged individuals, who are not looking for work because they believe there are no jobs available or none
for which they would qualify. The “other” marginally attached workers give a non-economic reason for not
looking for work. A third group that reports wanting a job are not marginally attached, meaning they have not
looked for work in the past 12 months. The remaining four categories from the survey broadly cover those who
respond that they do not want a job, including retirees, disabled individuals, those in school, and others.
Different groups of the non-employed have vastly different likelihood of transitioning into employment. For
example, people who want jobs have 13–14.5% probability of employment, while retired or disabled individuals
have less than 2% probability of becoming employed. The unemployed are also a heterogeneous group. The
short-term unemployed are twice as likely to enter the workforce as the long-term unemployed, who in turn are
twice as likely as people who are out of the labor force but want a job.
Figure 1 shows the population shares of
each of the nine groups in 2006, the
previous business cycle peak; 2010, the
highest unemployment rate in recent
years; and 2016, the most current year
available. Comparing 2006 and 2016, the
population share of unemployed is almost
unchanged but the composition has shifted
somewhat, with short-term unemployed
dropping from 2.57% in 2006 to 2.29% in
2016, and long-term unemployed growing
from 0.55% to 0.80%. The out-of-laborforce share has grown over the decade,
with more retired (15.22% versus 17.15%)
and more disabled (4.72 versus 5.55%) in
the population. This leads to the question
of how the labor markets in these periods
compare in terms of available labor
resources.
Figure 1
Population shares of non-employed groups
Percentage of working-age population
45
40
35
30
3.56
2.57
1.56
7.29
25
20
4.33
2.72
1.69
6.99
Unemployed:
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