What Is Unemployment Rate, And How Is It Calculated?

A cartoon visualizing the burden of unemployment on people.

The unemployment rate, as its name somewhat suggests, is the percentage of people in an economy that don’t have a job but want one. The rate of unemployment is important because it gives a reflection of how well the economy is performing. If many people are not working, it may mean that the economy is not performing well, while if more people have jobs, it would likely mean that the economy is doing better.

To calculate the unemployment rate, we are going to look at a few different pieces of information. First, we need to know how many people are in the labor force. The labor force includes everyone who either has a job or is actively seeking a job. It does not count people who are not working and are not seeking a job, such as students, retirees, or people who simply are not trying to find employment (discouraged workers).

Now, for finding the rate of unemployment, we use the following formula:

Unemployment Rate = (Number of Unemployed/Labor Force) x 100%

Every month, in the United States, a survey called the Current Population Survey, or CPS, is conducted by the Bureau of Labor Statistics. About 60,000 households are targeted for this survey. It asks people if they are working, if they are looking for work, or if they are not in the labor force. The BLS then uses these responses to calculate how many people are employed, how many are unemployed, and how many are not in the labor force.

People are counted as unemployed if they meet the following conditions: they are not working, have actively looked for work in the last four weeks, and are currently available to take a job. If a person has not specifically looked for work in the past four weeks, they don’t count as unemployed for this calculation, even if they would like a job.

Suppose, for example, that 150 million people are in the labor force and 10 million of those are out of work and looking for a job. Then the unemployment rate would be:

(10,000,000/150,000,000) x 100% = 6.67%

So, the unemployment rate would be about 6.7%.

It is important to note that the unemployment rate does not capture everything. For instance, it fails to account for people who have given up looking because they think no jobs are available or people that are underemployed, which is when someone is working a job that does not make full use of their time or skills.

Also, unemployment depends a lot on where one seeks to look. For example, it may be higher among youth and lower among older people. Unemployment changes with time as well; rates of unemployment can be seen climbing during an economic slump or recession simply because companies avoid hiring or lay off staff. However, as economic conditions improve, that rate tends to go down as more work opportunities become accessible.

Another point is that seasonal work contributes to the unemployment rate. As an example, there might be retail job openings exclusively over the holiday months, which can temporarily lower unemployment rates.

The BLS also provides alternative measures of unemployment, labeled U-1 through U-6. The unemployment rate most quoted is the U-3. However, the U-6 gives an even broader picture because it includes those who are underemployed or have stopped looking for work. For this reason, U-6 is always higher than U-3.

Understanding the unemployment rate is crucial, as this helps policymakers, businesses, and individuals in decision-making. For instance, if unemployment is high, the government might want to start job creation programs or unemployment benefits, and businesses may use this information to plan hiring or expansion. As for individuals, it may help in deciding whether to look for a job now or wait for better opportunities.

In conclusion, the unemployment rate is one of the most important gauges of economic health, and it is calculated by dividing the number of unemployed by the labor force and then multiplying that by 100%. It is based on surveys by the BLS to capture who is working, who is seeking work, and who is not part of the labor force. But even so, this rate has its limitations, since it doesn't capture everyone that is underemployed or doesn’t have a job (at least when looking at U-3).