Gross Labor-Market Flows and the July Labor Market

08.09.18
Written by Richard Hokenson 

Labor markets recorded another solid advance in July. Wage inflation remained moderate, continuing to defy expectations that the combination of strong employment and moderate wage inflation cannot possibly last. For the first seven months of this year, the average monthly increase in household employment is the best since 2014 (see Chart 1) and the average monthly increase in the labor force is the largest of this recovery (see Chart 2). Also worthy of mention is that the employment-population ratio for prime-age workers reached a post-recession high (see Chart 3).

 
 


The investment focus is always on the monthly changes, e.g. the difference between the number of persons employed this month versus last month, etc. These are net changes which are calculated from the monthly labor market survey. There is a significant amount of churning as individuals move from one labor force status to another. As described in more detail below, the change in household employment of 389,000 in July was comprised of 6.658 million persons who became employed in July versus June minus 6.269 million persons who were employed in June but not in July. The data on dynamic gross flows which underlie the net changes provide insightful perspectives on the reasons that underlie the net changes.

The most important positive developments from the labor force status flows data are:

  • The likelihood that persons who were employed last month are employed this month is close to a record high (see Chart 4).

  • The probability that someone who had a job last month will be unemployed this month is at a record low (see Chart 5). The same is also true for persons who were not in the labor force last month (see Chart 6).
 
 

The developments that signify that there is still room for some improvement are:

  • The likelihood that someone who is unemployed last month will become employed this month has shown substantial improvement but is still below the peak established earlier (see Chart 7).

  • The probability that someone remains unemployed has also improved but is still higher than previous lows (see Chart 8).

The developments that support our view that there is still much more potential are:

  • The likelihood that someone who was not in the labor force last month becoming employed this month has shown only moderate improvement (see Chart 9).

  • The probability that someone remains not in the labor force remains at elevated levels (see Chart 10).

 

Overview of Labor Force Status Flows

The monthly survey on household employment reports the number of persons employed, unemployed, or not in in the labor force. It is then possible to calculate the net change from these “stock” estimates. The specific sources of the net change, however, are not discernible from the published data because there is a significant amount of churning as individuals move from one labor force status to another. The data on dynamic gross flows underlie the net changes in the various labor market measures and provide additional and insightful perspectives on the reasons that underlie the net changes.

The basic source of the data on the labor force characteristics of the population is the monthly Current Population Survey (CPS). The Bureau of Labor Statistics (BLS) is able to collect these flow estimates because the CPS is administered to about three-quarters of the same households as in the previous month. This month-to-month overlap allows for the calculation of changes in labor force status from one month to the next.

The gross flow statistics confirm that the movements of persons between the three labor force statuses (Employed, Unemployed or Not in the Labor Force) are many times larger than the measured net changes for any given time period. As an illustration, consider the following example which is the change in household employment that occurred between June and July of this year. The published “stock” estimate shows an increase in household employment of 389,000. That net gain, however, was a result of inflows into employment of 6.658 million (4.804 million persons who had been out of the labor force in June 2018 who reported being employed in July plus 1.786 million persons who were unemployed in June who reported being employed in July) that was mostly offset by outflows of 6.269 million persons (4.653 million persons who were employed in June who said that they left the labor force in July joined by 1.526 million persons who became unemployed). The figures for other inflows or outflows principally represent adjustments for changes outside the survey, e.g. immigration, emigration, and deaths of respondents.

In any given month, a person in the civilian noninstitutional population who is 16 years old or older is in one of three labor force states: employed (E), unemployed (U), or not in the labor force (N). In the following month, the person could either have the same status or change to one of the other two states. Thus, one can express all of the possible combinations with the following 3x3 matrix.

The notation of the matrix is such that the first letter of each flow denotes the labor force status of someone in the previous month. The second letter denotes the state of an individual in the current month. The diagonal entries (i.e. EE, UU and NN) represent individuals whose labor force status did not change from the previous month.

The first column represents all persons who remain employed, although not necessarily with the same employer, over the month (EE), the number of unemployed persons who became employed (UE), and the number of persons who were previously not in the labor force who became employed (NE). The flows into unemployment (the second column) represent the number of employed who became unemployed (EU), the number of unemployed who remain unemployed from the prior month (UU) and the number of persons who were not in the labor force who became unemployed (NU). EU represents the total transition from employment last month into unemployment this month; those transitions include quits, terminations, and layoffs. The switch from not in the labor force last month into unemployment this month (NU) represents reentrants and new entrants into the labor force.

The third column lists flows into not in the labor force: the number of previously employed individuals who left the labor force (EN), those who were previously unemployed who left the labor force (UN) as well as the number of persons who remained out of the labor force (NN). The total transitions from employment to not in labor force (EN) could include retirements, as well as completed spells of seasonal employment. It also includes persons who lost their jobs and left the labor force. That would include but is not limited to discouragement regarding prospects of employment. The principal reasons for persons remaining in the not in labor force status are retirement, disability, family responsibilities, or discouragement. Not shown separately in this matrix are flows into and out of the civilian noninstitutional population age 16 and over.

 

This update was researched and written by Richard Hokenson, as of August 9 2018