6.1   How Economists Define and Compute Unemployment Rate

Learning Objectives

By the end of this section, you will be able to:

• Define unemployment and understand how it is measured
• Explain discourage workers and what it means to be in or out of the labor force
• Understand criticism of measuring unemployment

Previously we discussed Gross Domestic Product (GDP) and its calculation methods. GDP is measured both annually and quarterly. A recession is identified when the GDP experiences a decline for two consecutive quarters, not just a deceleration but an actual decline. A depression is characterized by a prolonged and deep recession.

The greatest symptom of a recession is unemployment as explained later.

Measuring Unemployment

Unemployment statistics are released to the press on the first Friday of every month and is  are based on a survey of households conducted by the Bureau of Labor Statistics (BLS).  The BLS draws a sample of 60,000 households that represents every sector of the country and complete many interviews with them.

At the end of the survey, a person can be considered: (1) employed; (2) unemployed; (3) nether.

Employed:

There are 3 categories to be classified as employed:

1. A person over the age of 16 must have worked one hour or more as a paid employee either for someone else or for his own business during the week of the interview.
2. Someone who is 16 or more and worked for at least 15 hours without getting paid but worked for a family enterprise.
3. Or someone who has a job but is temporarily without paid.

Unemployed:

A person who is 16 years old or older who is not working and is available for work and has made specific efforts to find work in the previous four weeks.

The key concept for an unemployed person, is a person who is available for work and is currently seeking work but cannot find it.

Neither:

Neither also known as out of the labor force. Out of the labor force – a person who is not looking for work, for example full time students, retirees or a stay at home parent, either because they does not want work or gave up looking for work.

Discouraged Worker:

A discouraged worker is an example of out of the labor force.  Someone who does not have a job and gave up looking for jobs, therefore is not considered unemployed.

The labor force is defined as those who are available for work; and is made up of the employed plus the unemployed.

Labor Force = Employed + Unemployed

 LF = E + U

Table 6.1   U.S. Employment and Unemployment, December 2023   (Source: https://data.bls.gov)

In this example, we can calculate the unemployment rate as 6,268 unemployed people divided by 167,451 people in the labor force, which works out to a 3.7% rate of unemployment. The following Work It Out feature will walk you through the steps of this calculation.

Work It Out

Calculating Labor Force Percentages

How do economists arrive at the percentages in and out of the labor force and the unemployment rate? We will use the values in Table 6.1to illustrate the steps.

To determine the labor force participation rate:

Step 1. Divide the number of people in the labor force (167,451) by the total adult (working-age) population (267,991).

Step 2. Multiply by 100 to obtain the percentage.

Labor Force Participation rate=   167,451/267,991 x 100 = 62.5%

To determine the unemployment rate:

Step 1. Divide the number of unemployed people  (6,268)) by the total labor force (167,451).

Step 2. Multiply by 100 to obtain the rate.

Unemployment rate = 6,268/167,451  x 100 = 3.7%

Criticisms of Measuring Unemployment

Measuring the number of unemployed can be complicated as it raises many questions. For example, one question it raises is, should we factor in what about people who do not have jobs and would be available to work, but are discouraged by the lack of available jobs in their area and stopped looking when measuring unemployment? Such people are known as “discouraged workers” and their families, may be suffering the pains of unemployment. However, the survey counts them as out of the labor force because they are not actively looking for work. Other people may tell the BLS that they are ready to work and looking for a job but, truly, they are not that eager to work and are not looking very hard at all. They are calculated as unemployed, although they might more accurately be classified as out of the labor force. Still other people may have a job, perhaps doing something like yard work, childcare, or cleaning houses, but are not reporting the income earned to the tax authorities. They may report being unemployed when they actually are working. Also, because the BLS defines employment as working 1 hour or more per week it is possible that someone is seeking full-time employment yet only works 5 hours per week, the BLS doesn’t distinguish between full-time and part-time status.

This chapter is a revised version of the chapters  8.1 How Economists Define and Compute Unemployment Rate in Principles of Macroeconomics 3e by OpenStax, published under a Creative Commons Attribution 4.0 International License. Other additions and modifications have been made in accord with the style, structure, and audience of this guide.