When I try to select people I get a message saying "There is nobody entered in the address book for you to select from."

When you add a family to the address book, it adds the family, but you still need to add the individual family members.  When you add or edit a family in the address book you will see a list of the family members on the right side of the dialog.  You need to use the "Add a person to this family" button to add the people to the family.