Economic Snapshot | Economic Growth

The fuzzy line between “unemployed” and “not in the labor force” and what it means for job creation strategies and the Federal Reserve

Jobless people are classified into one of two categories by the Bureau of Labor Statistics (BLS)—either unemployed or not in the labor force. To be classified as unemployed in the month they are surveyed, people must be actively looking for work. If they are not actively looking, they are classified as not in the labor force. This is a reasonable distinction to make. In 2017, about 40 percent of American adults were not working in a given month. If all of these adults were actively looking for work and not finding it, this would be an economic crisis. If none of these adults wanted work and were instead voluntarily retired, taking classes, or looking after dependents, it would not be a problem at all.

The unemployment rate is defined as the number of unemployed workers divided by the sum of employed and unemployed workers (or, the labor force). This rate tries exactly to capture what share of the adult population wants work, but hasn’t found it. This is why it is the most commonly referenced measure of “slack” in the labor market, or how many adults need new jobs created for them to fill. Today’s low unemployment rate has led many to conclude that the American labor market has very little slack left in it, and that new jobs going forward will be hard to fill without raising wages (perhaps even to inflationary degrees, the worries go).

The figure below provides a reason to be wary about accepting the unemployment rate as the only measure of labor market slack. It shows the share of newly employed workers who were not looking for work in the previous month. Two things stand out from the graph. First, the share of newly employed workers who were previously not searching for work is always high—well over half. Second, recent years have seen this share hit historic highs.

Figure A

Share of newly employed workers who said that they were not actively searching for work in the previous month

month Share of newly employed workers who said that they were not actively searching for work in the previous month
Apr-1990 0.619061
May-1990 0.625533
Jun-1990 0.619756
Jul-1990 0.620126
Aug-1990 0.615639
Sep-1990 0.623043
Oct-1990 0.610341
Nov-1990 0.612361
Dec-1990 0.603578
Jan-1991 0.598715
Feb-1991 0.589661
Mar-1991 0.585127
Apr-1991 0.576754
May-1991 0.575825
Jun-1991 0.572041
Jul-1991 0.580339
Aug-1991 0.577504
Sep-1991 0.577201
Oct-1991 0.572706
Nov-1991 0.569388
Dec-1991 0.570487
Jan-1992 0.568121
Feb-1992 0.570804
Mar-1992 0.571117
Apr-1992 0.571646
May-1992 0.57303
Jun-1992 0.5658
Jul-1992 0.564165
Aug-1992 0.561335
Sep-1992 0.559473
Oct-1992 0.5574
Nov-1992 0.558308
Dec-1992 0.56138
Jan-1993 0.5661
Feb-1993 0.577037
Mar-1993 0.582508
Apr-1993 0.584087
May-1993 0.582408
Jun-1993 0.58065
Jul-1993 0.575438
Aug-1993 0.575111
Sep-1993 0.580261
Oct-1993 0.589173
Nov-1993 0.584807
Dec-1993 0.583045
Jan-1994 0.587624
Feb-1994 0.592373
Mar-1994 0.590883
Apr-1994 0.586644
May-1994 0.583134
Jun-1994 0.584736
Jul-1994 0.585821
Aug-1994 0.590357
Sep-1994 0.591369
Oct-1994 0.597964
Nov-1994 0.600868
Dec-1994 0.603204
Jan-1995 0.603524
Feb-1995 0.595307
Mar-1995 0.596899
Apr-1995 0.597369
May-1995 0.592238
Jun-1995 0.595425
Jul-1995 0.594958
Aug-1995 0.599668
Sep-1995 0.60216
Oct-1995 0.598554
Nov-1995 0.606096
Dec-1995 0.598981
Jan-1996 0.597842
Feb-1996 0.602802
Mar-1996 0.606867
Apr-1996 0.609937
May-1996 0.607053
Jun-1996 0.608479
Jul-1996 0.614605
Aug-1996 0.607839
Sep-1996 0.6092
Oct-1996 0.602445
Nov-1996 0.605638
Dec-1996 0.596219
Jan-1997 0.590755
Feb-1997 0.589335
Mar-1997 0.602804
Apr-1997 0.613959
May-1997 0.617748
Jun-1997 0.611254
Jul-1997 0.603536
Aug-1997 0.612553
Sep-1997 0.618873
Oct-1997 0.624974
Nov-1997 0.626926
Dec-1997 0.628275
Jan-1998 0.633389
Feb-1998 0.626991
Mar-1998 0.628814
Apr-1998 0.623807
May-1998 0.634939
Jun-1998 0.632458
Jul-1998 0.641844
Aug-1998 0.639763
Sep-1998 0.652355
Oct-1998 0.651439
Nov-1998 0.650647
Dec-1998 0.649278
Jan-1999 0.655927
Feb-1999 0.655434
Mar-1999 0.642018
Apr-1999 0.652837
May-1999 0.66117
Jun-1999 0.674181
Jul-1999 0.663779
Aug-1999 0.656528
Sep-1999 0.653479
Oct-1999 0.655027
Nov-1999 0.652588
Dec-1999 0.651059
Jan-2000 0.643748
Feb-2000 0.654028
Mar-2000 0.656551
Apr-2000 0.65868
May-2000 0.655965
Jun-2000 0.659235
Jul-2000 0.653902
Aug-2000 0.654676
Sep-2000 0.655974
Oct-2000 0.665117
Nov-2000 0.673867
Dec-2000 0.680896
Jan-2001 0.690268
Feb-2001 0.68553
Mar-2001 0.679095
Apr-2001 0.66877
May-2001 0.657618
Jun-2001 0.653238
Jul-2001 0.657462
Aug-2001 0.661782
Sep-2001 0.665689
Oct-2001 0.654644
Nov-2001 0.643888
Dec-2001 0.629164
Jan-2002 0.625571
Feb-2002 0.623252
Mar-2002 0.616762
Apr-2002 0.619352
May-2002 0.628136
Jun-2002 0.644323
Jul-2002 0.645082
Aug-2002 0.640423
Sep-2002 0.63054
Oct-2002 0.630722
Nov-2002 0.637024
Dec-2002 0.640892
Jan-2003 0.642075
Feb-2003 0.641867
Mar-2003 0.644924
Apr-2003 0.642806
May-2003 0.636523
Jun-2003 0.635369
Jul-2003 0.630534
Aug-2003 0.632354
Sep-2003 0.634281
Oct-2003 0.643246
Nov-2003 0.647303
Dec-2003 0.636562
Jan-2004 0.636161
Feb-2004 0.634296
Mar-2004 0.648754
Apr-2004 0.643155
May-2004 0.642887
Jun-2004 0.637252
Jul-2004 0.642145
Aug-2004 0.645397
Sep-2004 0.640996
Oct-2004 0.642333
Nov-2004 0.639803
Dec-2004 0.644414
Jan-2005 0.646355
Feb-2005 0.647678
Mar-2005 0.648725
Apr-2005 0.651202
May-2005 0.657558
Jun-2005 0.660922
Jul-2005 0.665709
Aug-2005 0.658748
Sep-2005 0.665393
Oct-2005 0.661679
Nov-2005 0.659547
Dec-2005 0.659208
Jan-2006 0.657889
Feb-2006 0.672929
Mar-2006 0.672584
Apr-2006 0.676422
May-2006 0.673081
Jun-2006 0.671832
Jul-2006 0.667113
Aug-2006 0.664034
Sep-2006 0.658985
Oct-2006 0.669053
Nov-2006 0.676322
Dec-2006 0.683012
Jan-2007 0.68031
Feb-2007 0.670085
Mar-2007 0.664751
Apr-2007 0.658189
May-2007 0.661974
Jun-2007 0.67604
Jul-2007 0.67685
Aug-2007 0.6756
Sep-2007 0.668733
Oct-2007 0.669893
Nov-2007 0.674907
Dec-2007 0.665956
Jan-2008 0.663952
Feb-2008 0.654468
Mar-2008 0.656006
Apr-2008 0.647446
May-2008 0.651409
Jun-2008 0.649366
Jul-2008 0.652727
Aug-2008 0.642415
Sep-2008 0.629132
Oct-2008 0.621308
Nov-2008 0.619062
Dec-2008 0.623007
Jan-2009 0.622165
Feb-2009 0.616412
Mar-2009 0.60786
Apr-2009 0.598018
May-2009 0.596437
Jun-2009 0.582744
Jul-2009 0.574579
Aug-2009 0.569886
Sep-2009 0.567641
Oct-2009 0.576422
Nov-2009 0.567488
Dec-2009 0.576904
Jan-2010 0.578612
Feb-2010 0.587717
Mar-2010 0.586724
Apr-2010 0.573916
May-2010 0.564274
Jun-2010 0.565743
Jul-2010 0.572292
Aug-2010 0.584419
Sep-2010 0.58809
Oct-2010 0.588882
Nov-2010 0.589282
Dec-2010 0.584289
Jan-2011 0.591446
Feb-2011 0.594683
Mar-2011 0.601371
Apr-2011 0.603528
May-2011 0.602166
Jun-2011 0.596796
Jul-2011 0.597807
Aug-2011 0.595821
Sep-2011 0.606437
Oct-2011 0.597534
Nov-2011 0.598333
Dec-2011 0.590722
Jan-2012 0.591505
Feb-2012 0.59129
Mar-2012 0.594276
Apr-2012 0.602752
May-2012 0.609131
Jun-2012 0.615909
Jul-2012 0.617823
Aug-2012 0.623328
Sep-2012 0.622822
Oct-2012 0.619895
Nov-2012 0.618395
Dec-2012 0.625089
Jan-2013 0.622187
Feb-2013 0.615453
Mar-2013 0.616257
Apr-2013 0.630587
May-2013 0.634564
Jun-2013 0.631616
Jul-2013 0.622948
Aug-2013 0.629017
Sep-2013 0.63489
Oct-2013 0.642887
Nov-2013 0.641139
Dec-2013 0.635523
Jan-2014 0.639282
Feb-2014 0.634809
Mar-2014 0.638696
Apr-2014 0.626694
May-2014 0.640433
Jun-2014 0.643762
Jul-2014 0.660209
Aug-2014 0.656453
Sep-2014 0.653649
Oct-2014 0.649485
Nov-2014 0.654021
Dec-2014 0.658727
Jan-2015 0.673065
Feb-2015 0.677886
Mar-2015 0.683661
Apr-2015 0.67824
May-2015 0.682307
Jun-2015 0.680813
Jul-2015 0.690146
Aug-2015 0.687777
Sep-2015 0.688177
Oct-2015 0.686184
Nov-2015 0.687963
Dec-2015 0.691383
Jan-2016 0.688694
Feb-2016 0.697439
Mar-2016 0.703791
Apr-2016 0.704355
May-2016 0.693009
Jun-2016 0.690739
Jul-2016 0.690826
Aug-2016 0.696935
Sep-2016 0.691895
Oct-2016 0.681299
Nov-2016 0.678957
Dec-2016 0.689265
Jan-2017 0.696841
Feb-2017 0.690351
Mar-2017 0.68693
Apr-2017 0.690273
May-2017 0.697058
Jun-2017 0.70615
Jul-2017 0.704329
Aug-2017 0.709059
Sep-2017 0.703789
Oct-2017 0.705424
Nov-2017 0.710066
Dec-2017 0.70918
Jan-2018 0.715345
Feb-2018 0.710054
Mar-2018 0.705621

 

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Source: Bureau of Labor Statistics

Source: Bureau of Labor Statistics, Labor Force Flows: Unemployed to Employed (16 Years and Over) [LNS17400000], and Not in Labor Force to Employed (16 years and over) [LNS17200000], retrieved from FRED (Federal Reserve Bank of St. Louis), March 28, 2018

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There are a couple of policy takeaways here. First, because more and more jobs are being filled by people claiming to not have been looking for work it seems like the unemployment rate is becoming less useful as a clear-cut measure of labor market slack—this means we shouldn’t rely on it alone to decide whether or not the economy is at full employment. Second, even with unemployment low, it seems like Americans have plenty of appetite for new jobs (and particularly for good jobs). This means we should still be thinking hard about strategies for job creation—like I did in a recent paper. Finally, we don’t need policymakers who are committed to slowing the economy because they think unemployment has fallen low enough. Instead, we need policymakers willing to aggressively test just how fast the economy can grow before sparking inflation. The most important policymakers in this regard are the Federal Reserve, and this makes the next pick to head the Federal Reserve Bank of New York crucially important.


See related work on Monetary policy and the Federal Reserve | Unemployment | Jobs and Unemployment

See more work by Josh Bivens