Department of Labor and Regulation

Title - Labor Market Information Center

Labor Supply - Technical Notes

Labor supply can be defined as the number of persons who would potentially apply for work if a job becomes available. There are basically two ways to estimate labor supply. One way to estimate labor supply is a survey of a geographical area. Many current labor surveys use the "labor shed" concept, which includes commuting from other communities in the estimate. There are pros and cons to conducting and using the results of a labor survey. On the positive side, a labor survey can provide detailed information about the labor supply, including the wages and types of jobs of interest. Sometimes a prospective business may demand a labor survey before they locate to an area, and labor surveys are easier to understand conceptually. On the negative side, a statistically-valid survey is usually quite expensive. Depending upon changes in the economy, the labor survey results could be valid for only one month or up to a year. Thirdly, labor surveys are conducted by different vendors or groups using different methodologies, and the results are not easily compared to other surveys and cannot be summed to provide a statewide perspective to labor supply.

Another method that can be used to estimate labor supply is a "handbook" approach. The LMIC currently uses this approach to develop labor supply estimates for counties and Metropolitan Statistical Areas. The "handbook" approach attempts to measure labor supply for nonfarm wage and salaried jobs. One of the advantages of the "handbook" approach is that it is a cost-effective way of making labor supply estimates for areas that exhaust the state's geography.

Potential workers can be categorized into two groups: those with jobs and those without jobs. Estimates for the number of workers with jobs who may be willing to change jobs can be made based on historical hiring trends. Those types of workers are sometimes loosely termed the "underemployed" (working part-time but want full-time work, working in jobs not in line with their education, want to find a better paying job, want a job with benefits, etc.).

Since the goal is to determine the labor supply for nonfarm wage and salaried jobs, the starting point is the nonfarm worker numbers which LMIC estimates by county each month. Using that county data, the "handbook" approach determines the relative share of nonfarm workers who may be willing to change jobs. This is where historical hiring patterns come into play. New hire rates for wage and salaried workers covered by unemployment insurance produced by the Local Employment Dynamics (LED) program, administered by the U.S. Census Bureau, are utilized for this purpose. New hire rates indicate the percentage of all covered workers who show up on an employer's quarterly payroll as a new hire. In other words, they have not been employed by that business in previous quarters. So new hire rates for the reference quarter in each of the most recent four years for which data is available are used to calculate current quarterly new hire rates. For example, for the months of January, February and March 2012, average quarterly new hire rates for the first quarter reference period for the years 2008-2011 will be used to estimate current quarterly new hire rates -- as an indicator of the relative share of 'nonfarm workers who may be willing to change jobs.'

The updated new hire methodology will incorporate seasonal and cyclical employment patterns within the state workforce throughout the year.

The final step in this part of the procedure is to adjust for multiple job holders. Since nonfarm wage and salaried worker estimates are counts of workers at jobs, a single individual can be counted more than once.
After the adjustment for multiple jobs, the 'labor supply underemployed' represents a count of individuals who are working and willing to change jobs. Here is an example of the calculation of the 'labor supply underemployed' for Beadle County.

Nonfarm
Workers
x New Hire Rate x Adjusted for
Dual
Job Holders
= Labor Supply
Underemployed
8,530
0.115322
0.86
846

People without jobs make up a large share of the labor supply. The "handbook" approach to determine the 'labor supply not employed' includes a procedure to estimate the number of people who are not working and would be available for new jobs. The starting point for this part of the methodology is to gather information on those who are not currently employed. The main source of this information is the level of unemployed residents in the state provided by the Local Area Unemployment Statistics (LAUS) program administered by the Bureau of Labor Statistics, U.S. Department of Labor.

Also included is an estimate of those who are currently not active in the labor force, but want a job, have searched for work in the past year and are currently available to work. This is an estimate of persons who are not currently employed but are available to work, also referred to as discouraged workers*.

The net result is an estimate of the 'not employed.'

Unemployed + Estimate of those currently not in the labor force, but have searched for work in the past year and are available to work = Labor Supply
Not Employed
365 69 434

In the final step of estimating labor supply, the 'labor supply underemployed' and the 'labor supply not employed' are added together. Again, here is an example of the final calculation of labor supply for Beadle County.

Labor Supply Underemployed

+

Labor Supply
Not Employed

=

Labor Supply

846

434

1,280

*Discouraged workers are a subset of persons marginally attached to the labor force. The marginally attached are those persons not in the labor force who want and are available for work, and who have looked for a job sometime in the prior 12 months, but were not counted as unemployed because they had not searched for work in the four weeks preceding the survey. Among the marginally attached, discouraged workers were not currently looking for work specifically because they believed no jobs were available for them or there were none for which they would qualify. The statewide discouraged worker estimate is derived from unpublished data gathered through the Current Population Survey (CPS) conducted by the U.S. Census Bureau. These estimates, particularly labor force data for smaller states, are subject to rather large sampling error.


Marcia Hultman, Secretary
700 Governors Drive
Pierre, SD 57501-2291
Tel. 605.773.3101
Fax. 605.773.6184