The Unemployment Rate

A person is unemployed if he or she is without work and is actively seeking paid work. Knowing the amount of unemployment in an economy would help gauge the overall health of that economy. Human activity in paid work can be one of the biggest resources a country has. The number of employed alone is not so meaningful. The number of employed in relation to a reference popula- tion would be more helpful in making comparisons over time. For instance, if we only cited the number of persons seeking employment we would only know that more people were seeking work. We wouldn’t know if more people were looking for work because population went up or because there were more businesses closing. If we look at the percentage of people looking for work over the labor force, the number of people eligible for work, then that gives us a measure of an unemployment rate.
The unemployment rate is expressed as a percentage, and is calculated as follows:
Unemployment rate = # unemployed X 100% # in labor force
We make one modification to the definition of the unemployment rate by breaking down the labor force into its components of unemployed workers and employed workers.
Unemployment rate = # unemployed X 100% # unemployed + # employed
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Part 4: Economic Institutions
Notice that the #unemployed show up in both the numerator and the denominator of the definition. If the number of unemployed increases more rel- ative the number of employed, then the top will increase more than the bottom and the measure increases. It is doing exactly what it is designed to do. It can also work in the other direction.
The problem with this measure is what it takes to be considered unem- ployed. Unemployed workers are those who are currently not working but are willing and able to work for pay, currently available to work, and have actively searched for work. Individuals who are actively seeking work must make the effort. If they merely would like to be employed, they are not counted as unem- ployed. People who disengage from the labor market either by not working or not actively seeking employment are called discouraged workers. Discouraged workers are not counted as unemployed or employed.
If the number of unemployed drops because people are leaving the labor market entirely, that can have the effect of a falling unemployment rate in con- junction with a worsening employment situation. This phenomenon is called the discouraged worker effect.
Some economists site the Labor force participation rate as an alternative indicator of employment. This measure compares the number of people in the labor force with the civilian population. The civilian population in this context refers to people over 16 who are not in an institution (prison, for example) and who are not enlisted in the military.
Labor force participation rate = # labor force X 100% # population
This measure isn’t without its problems. The population includes individuals post retirement age. What would happen to this measure if, say, large numbers of people started to retire?
Perhaps a better measure of whether Americans who should be working are working would be an employment-to-population ratio for people of prime working age.
The unemployment rate and related measures are conceptually simple to calculate. However, a little investigation into the construction of the measures and the definitions of terms reveal how easily they can be misinterpreted and therefore potentially misused.
The Bureau of Labor Statistics prepares the labor statistics for the US. Further exploration of www.bls.gov is highly recommended.