Are Labor Market Indicators Telling the Truth? Role of Measurement Error in the U.S. Current Population Survey

Author/Editor:

Ippei Shibata

Publication Date:

February 26, 2019

Electronic Access:

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Summary:

Labor market indicators are critical for policymakers, but measurement error in labor force survey data is known to be substantial. In this paper, I quantify the implications of classification errors in the U.S. Current Population Survey (CPS), in which respondents misreport their true labor force status. Once I correct for measurement error using a latent variable approach, the unemployment rate is on average 0.8 percentage points (ppts) higher than the official unemployment rate, with a maximum of 2.0 ppts higher between 1996 and 2018. This paper further quantifies the contributions to business-cycle fluctuations in the unemployment rate from job separation, job finding, and participation. Correcting for misclassification changes previous studies' results about the contributions of these transition probabilities: job separation accounts for more of the unemployment fluctuations, while participation accounts for fewer. The methodology I propose can be applied to any other labor force survey in which labor force status is observed for three periods.

Series:

Working Paper No. 2019/040

Subject:

English

Publication Date:

February 26, 2019

ISBN/ISSN:

9781498300452/1018-5941

Stock No:

WPIEA2019040

Pages:

40

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