This article is about how is the unemployment rate determined. The unemployment rate is one of the most important indicators of the health of the economy. It measures the percentage of people who are actively looking for work but cannot find a job.
On What Factors is the Unemployment Rate Based?
The unemployment rate is based on a monthly survey of households conducted by the Bureau of Labor Statistics (BLS). The survey, called the Current Population Survey (CPS), asks about 60.000 households about their employment status in the previous week. The survey covers people who are 16 years or older and not institutionalized, such as in prisons or nursing homes.
The BLS classifies people into three categories based on their answers to the survey:
- Employed: People who worked for pay or profit, or who worked without pay in a family business or farm, for at least one hour in the reference week. This also includes people who had a job but were temporarily absent due to illness, vacation, bad weather, labor dispute, or other reasons.
- Unemployed: People who did not work in the reference week, but were available and actively looking for work in the previous four weeks. This also includes people who were waiting to be recalled from a temporary layoff.
- Not in the labor force: People who did not work in the reference week and were not looking for work in the previous four weeks. This includes people who are retired, students, homemakers, disabled, discouraged, or otherwise not interested in working.
How is the Unemployment Rate Determined?
The unemployment rate is calculated by dividing the number of unemployed people by the total number of people in the labor force. The labor force is the sum of employed and unemployed people. For example, if there are 10 million unemployed people and 150 million people in the labor force, the unemployment rate is 10 million / 150 million = 0.0667 or 6.67%.
The unemployment rate is not a perfect measure of the state of the labor market. It does not capture people who are underemployed, meaning they work part-time but want to work full-time, or they work in jobs that do not match their skills or education. It also does not capture people who are discouraged, meaning they have given up looking for work because they believe there are no jobs available for them.
What are the Other Measures of Labor Underutilization?
The BLS publishes other measures of labor underutilization that include these groups of people. For example, the U-6 rate is the broadest measure of unemployment and underemployment. It includes people who are unemployed, plus people who are marginally attached to the labor force (meaning they want to work and have looked for work in the past year, but not in the past four weeks), plus people who are working part-time for economic reasons (meaning they want to work full-time but cannot find full-time work). The U-6 rate is usually higher than the official unemployment rate.
Bottom Line
In this article, we have discussed how is the unemployment rate determined. The unemployment rate is a useful indicator of the economic conditions and trends, but it should be interpreted with caution and context. It does not tell the whole story of how well the labor market is functioning or how well people are doing.
