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December, 1987, Vol. 110, No. 12
What is the effect of random variation in State unemployment rates?Edward W. Hill
The reported monthly unemployment rate from the Current Population Survey (CPS) is the best point estimate of labor market activity available by State and local labor market areas. Because of its timeliness, wide coverage, and comprehensiveness, it is used by governments, planners, corporations, and the media. However, statements are often made about fluctuations in the unemployment rate which are unwarranted due to the variance of the data series.
The inverse of the unemployment rate is commonly used as a proxy for gross regional product. It is also used intraregionally, as a coincident indicator of the local business cycle. Interregionally, it is used as a sign of the relative strength of local economies. The unemployment rate is also an important instrument in public policy decisions. This is especially true at the State and local levels where announcements in the rate can trigger political activity. The annual rate is used by the Federal Government to redistribute funds to the States. In many States, the rate is used as part of formulae to redistribute funds from State to local governments. It is also used to extend or contract the length of time people are eligible for unemployment benefits.
Most of these uses of the unemployment rate for States and localities assume that it has low levels of dispersion and that month-to-month movements in the rate are meaningful. Because users usually do not pay attention to error attributed to random variation in sampling, they may be using the unemployment rate to make inferences, decisions, resource allocations, or policy statements which are unwarranted.
This excerpt is from an article published in the December 1987 issue of the Monthly Labor Review. The full text of the article is available in Adobe Acrobat's Portable Document Format (PDF). See How to view a PDF file for more information.
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Current Population Survey
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