Calculating the unemployment rate

Nonfarm payrolls jumped higher in May, yet so too did the unemployment rate - wondering why? Here's what you need to know.

In order to understand the employment picture in the United States, the first thing to know, is that employment is measured monthly via two different surveys: the establishment survey, and the household survey.

The establishment survey refers to the Current Employment Statistics (CES) survey, which surveys approximately 122,000 businesses and government agencies every month. From the CES survey, estimates of nonfarm payroll employment, hours worked and earnings are derived, with industry and geographic detail.

The household survey refers to the Current Population Survey (CPS), which is conducted by the U.S. Bureau of Census for the U.S. Bureau of Labor Statistics (BLS). Amidst other items, the CPS survey gathers estimates of the labor force, employment, and unemployment, with demographic detail.

The household and establishment survey measure employment differently

In addition to who is actually surveyed, there’s a number of technical differences between how employment is calculated between the household and establishment surveys, with distinctions between factors such as how multiple jobholders and workers on unpaid leave, are treated.

A summary of the key differences can be seen in the table below:

Note the much wider 90% confidence interval between the household and establishment surveys — this is a key reason as to why the most commonly quoted monthly employment change is that of the establishment survey.

Methodology differences can lead to widely contrasting employment pictures — which occurred in May 2023

The differences between the way that employment is calculated in the household and establishment surveys, can lead to widely contrasting monthly employment numbers.

The employment report for May 2023 was an excellent example of this, whereby the establishment survey of employment recorded relatively strong growth of 339,000, while the household survey of employment recorded a DECLINE of 310,000.

A big reason for the divergence in May, was a decline in unincorporated self-employment of 412,000, which is included in the household survey, but is not included in the establishment survey of payroll employment.

In the chart below, it can be seen that: 1) the two surveys generally see materially different monthly employment changes; and 2) the household survey is much more volatile.

The unemployment rate is calculated based upon the household survey — here are the key details

As the household survey calculates additional necessary information such as the size of the labor force, the unemployment rate is based upon household survey data.

Given that the BLS and the media will generally quote monthly employment growth based upon the establishment survey of nonfarm payrolls, it can lead to situations whereby one can simultaneously read of strong monthly employment growth (as per the establishment survey), and a rise in the unemployment rate (as per the household survey) — which is exactly what occurred in May 2023.

In order to calculate the unemployment rate, the number of unemployed individuals is divided by the size of the labor force.

Unemployment rate = number of unemployed individuals ÷ labor force

What exactly does it mean to be employed or unemployed, for the purposes of the household survey?

Essentially, somebody with a job is classified as being employed — which as shown in the table above, even includes individuals who are on unpaid leave.

People who are: 1) jobless; 2) have actively looked for work within the last 4 weeks; and 3) are available for work, are classified as unemployed.

The labor force is equal to the total number of employed and unemployed individuals.

Labor force = employed individuals + unemployed individuals

Only the civilian noninstitutional population above the age of 16 are included in the survey. This excludes those in a correctional facility, residential nursing, mental health facility, and those on active duty in the Armed Forces.

Taking the latest data for May 2023, we can see that the size of the civilian labor force was estimated at 166.8m, while the total civilian noninstitutional population was estimated at 266.6m. This gives a participation rate of 62.6%.

Participation rate = labor force ÷ civilian noninstitutional population

Remember, the labor force is equal to the total number of employed individuals (estimated to have been 160.7m in May 2023) and unemployed individuals (estimated to have been 6.1m in May 2023).

Dividing the number of unemployed (6.1m) by the size of the labor force (166.8m), gives the unemployment rate, which was 3.7% in May 2023.

Can the unemployment rate rise when household survey employment increases?

Yes, and it has done so on many an occasion. The last time it occurred was in February 2023, when household employment rose by 177k, but the unemployment rate increased from 3.4% to 3.6%.

How can this happen? Remember the two components of the unemployment rate — the number of unemployed individuals and the size of the labor force.

Even if the number of employed individuals grows, if the size of the labor force increases by a greater amount, then there will also be an increase in the number of unemployed individuals.

The proportional shift in the number of unemployed individuals and the size of the labor force, will determine whether the unemployment rate rises.

Looking at February 2023 data, we can see that the labor force increased in size by 419,000, which after subtracting the increase in employment of 177,000, meant that the number of unemployed individuals increased by 242,000. This resulted in the unemployment rate rising from 3.4% to 3.6%.

A summary of the relevant data can be seen in the table below:

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