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The FRED® Blog

How healthy is the labor market, really?


Economists, policy wonks, and the public often look at the unemployment rate to quickly assess the U.S. economy. Although the unemployment rate provides some understanding of the cyclical state of the labor market, it doesn’t account for those who have dropped out of the labor force. The labor force participation rate captures that information. Both rates (shown in the top graph) have declined since the end of the Great Recession, which may imply that there’s unmeasured slack in the labor market.

Andreas Hornstein and Marianna Kudlyak from the Federal Reserve Bank of Richmond and Fabian Lange from McGill University constructed a more comprehensive way of examining resource utilization in the U.S. labor market. Their non-employment index (NEI) counts those who are unemployed (as traditionally defined) and those who have dropped out of the labor force. The NEI weights those who have dropped out of the labor force according to their “attachment”—defined by the Bureau of Labor Statistics as the likelihood a person will transition back to employment, which is based on each group’s historical transition rate to employment relative to the highest transition rate among all groups. This weighting allows the authors to count all non-employed individuals without drawing “arbitrary distinctions on who is to be included.”

The BLS classifies the groups in the index as (1) unemployed, (2) out of the labor force but desiring a job, or (3) out of labor force but without the intention to reenter. The BLS further categorizes those who are out of the labor force but want a job as (2a) marginally attached because they’re discouraged by poor job prospects, (2b) marginally attached but haven’t looked for work during the most recent month, or (2c) temporarily out of the labor force for other reasons. Finally, the BLS classifies those who are out of the labor force but do not want a job as (3a) in school, (3b) not in school, (3c) retired, or (3d) disabled.

Hornstein, Kudlyak, and Lange recommend interpreting the NEI in comparison with the standard measure of unemployment. Generally, the two measures move in line with each other, with the exception of the period following the Great Recession, as shown in the bottom graph. This graph also includes a third series—the green line—that incorporates those who work part time in lieu of full time for economic reasons. More information on the NEI can be found here.

How these graphs were created: Top graph: Search for and select the monthly, seasonally adjusted unemployment rate. Use the “Add Data Series”/“Add new series” option to search for and select the monthly, seasonally adjusted labor force participation rate; be sure to set the y-axis position to the right. Bottom graph: Again, search for and select the monthly, seasonally adjusted unemployment rate. Then use the “Add Data Series”/“Add new series” option to add the two other series: Search for “non employment index” and select the base index (not the index that includes people working part-time for economic reasons). Then search for “non employment index” again and select the index that includes people working part-time for economic reasons.

Suggested by Travis May

View on FRED, series used in this post: CIVPART, NEIM156SFRBRIC, NEIPTERM156SFRBRIC, UNRATE


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