Calculating Unemployment

Unemployment is typically described in newspaper or television reports as a percentage or a rate. A recent report might have said, for example, from January 2013 to December 2013, the U.S. unemployment rate dropped from 8.0% to 6.7%, and by the close of 2015, it had fallen to 5.0%. At a glance, the changes between the percentages may seem small. But remember that the U.S. economy has about 155 million adults who either have jobs or are looking for them. A rise or fall of just 0.1% in the unemployment rate of 155 million potential workers translates into 155,000 people, which is roughly the total population of a city like Syracuse, New York, Brownsville, Texas, or Pasadena, California. Large rises in the unemployment rate mean large numbers of job losses. The decrease in unemployment from 8% in 6.7% 2013 meant an additional 2.02 million people were employed who had previously been looking for work.

The Bureau of Labor Statistics tracks and reports all data related to unemployment.

Who’s In or Out of the Labor Force?

Should everyone without a job be counted as unemployed? Of course not. Children, for example, should not be counted as unemployed. Surely, the retired should not be counted as unemployed. Many full-time college students have only a part-time job, or no job at all, but it seems inappropriate to count them as suffering the pains of unemployment. Some people are not working because they are rearing children, ill, on vacation, or on parental leave.

The point is that the adult population is not just divided into employed and unemployed. A third group exists: people who do not have a job, and for some reason—retirement, looking after children, taking a voluntary break before a new job—are not interested in having a job, either. It also includes those who do want a job but have quit looking, often due to being discouraged by their inability to find suitable employment. Economists refer to this third group of those who are not working and not looking for work as out of the labor force or not in the labor force.

The U.S. unemployment rate, which is based on a monthly survey carried out by the U.S. Bureau of the Census, asks a series of questions to divide up the adult population into employed, unemployed, or not in the labor force. To be classified as unemployed, a person must be without a job, currently available to work, and actively looking for work in the previous four weeks. Thus, a person who does not have a job but who is not currently available to work or has not actively looked for work in the last four weeks is counted as out of the labor force.

• Employed: currently working for pay
• Unemployed: Out of work and actively looking for a job
• Out of the labor force: Out of paid work and not actively looking for a job
• Labor force: the number of employed plus the unemployed

Calculating the Unemployment Rate

Figure 7.2 shows the three-way division of the over-16 adult population. In 2012, 63.7% of the adult population was “in the labor force;” that is, either employed or without a job but looking for work. Those in the labor force can be divided into the employed and the unemployed. These values are also shown in Table 7.1. The unemployment rate is not the percentage of the total adult population without jobs, but rather the percentage of adults who are in the labor force but who do not have jobs:

$\text{Unemployment rate}=\frac{\text{Unemployed people}}{\text{Total labor force}}\times{100}$

Figure 7.2. Employed, Unemployed, and Out of the Labor Force Distribution of Adult Population (age 16 and older), 2012 The total adult, working-age population in 2012 was 243.2 million. Out of this total population, 142.4 million were classified as employed and 12.5 million were classified as unemployed. The remaining 88.3 million were classified as out of the labor force. As you will learn, however, this seemingly simple chart does not tell the whole story.

Table 7.1. U.S. Employment and Unemployment, 2012
Total adult population over the age of 16  243.2 million
In the labor force  154.9 million (63.7%)
Employed  142.4 million
Unemployed  12.5 million
Out of the labor force  88.3 million (36.3%)
Source: www.bls.gov

In this example, the unemployment rate can be calculated as 12.5 million unemployed people divided by 155.0 million people in the labor force, which works out to an 8.1% rate of unemployment.

Calculating Labor Force Percentages

So 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 7.1 to illustrate the steps. To determine the percentage in the labor force:

Step 1. Divide the number of people in the labor force (154.9 million) by the total adult (working-age) population (243.2 million).

Step 2. Multiply by 100 to obtain the percentage.

$\begin{array}{l}\text{Percentage in the labor force}=\frac{154.9}{243.2}\\\text{Percentage in the labor force}=0.6369\\\text{Percentage in the labor force}=63.7\text{ percent}\end{array}$

To determine the percentage out of the labor force:

Step 1. Divide the number of people out the labor force (88.3 million) by the total adult (working-age) population (243.2 million).

Step 2. Multiply by 100 to obtain the percentage.

$\begin{array}{l}\text{Percentage in the labor force}=\frac{88.3}{243.2}\\\text{Percentage in the labor force}=0.3631\\\text{Percentage in the labor force}=36.3\text{ percent}\end{array}$

To determine the unemployment rate:

Step 1. Divide the number of unemployed people (12.5 million) by the total labor force (154.9 million).

Step 2. Multiply by 100 to obtain the rate.

$\begin{array}{l}\text{Unemployment rate}=\frac{12.5}{154.9}\\\text{Unemployment rate}=0.0807\\\text{Unemployment rate}=8.1\text{ percent}\end{array}$

Hidden Unemployment

Even with the “out of the labor force” category, there are still some people that are mislabeled in the categorization of employed, unemployed, or out of the labor force. There are some people who have only part time or temporary jobs and who are looking for full time and permanent employment that are counted as employed, though they are not employed in the way they would like or need to be. Additionally, there are individuals who are underemployed. This includes those that are trained or skilled for one type or level of work who are working in a lower paying job or one that does not utilize their skills. For example, an individual with a college degree in finance who is working as a sales clerk would be considered underemployed. They are, however, also counted in the employed group. All of these individuals fall under the umbrella of the term “hidden unemployment.” Discouraged workers, those who have stopped looking for employment and, hence, are no longer counted in the unemployed also fall into this group

Labor Force Participation Rate

Another important statistic is the labor force participation rate. This is the percentage of adults in an economy who are either employed or who are unemployed and looking for a job. So, using the data in Figure 7.2 and Table 7.1, those included in this calculation would be the 154.9 million individuals in the labor force. The rate is calculated by taking the number employed, divided by the total adult population and multiplying by 100 to get the percentage. For the data from 2012, the labor force participation rate is 63.7%. In the United States the labor force participation rate is usually around 67-68%.

The Establishment Payroll Survey

When the unemployment report comes out each month, the Bureau of Labor Statistics (BLS) also reports on the number of jobs created—which comes from the establishment payroll survey. The payroll survey is based on a survey of about 140,000 businesses and government agencies throughout the United States. It generates payroll employment estimates by the following criteria: all employees, average weekly hours worked, and average hourly, weekly, and overtime earnings. One of the criticisms of this survey is that it does not count the self-employed. It also does not make a distinction between new, minimum wage, part time or temporary jobs and full time jobs with “decent” pay.

How Is the U.S. Unemployment Data Collected?

The unemployment rate announced by the U.S. Bureau of Labor Statistics each month is based on the Current Population Survey (CPS), which has been carried out every month since 1940. Great care is taken to make this survey representative of the country as a whole. The country is first divided into 3,137 areas. The U.S. Bureau of the Census then selects 729 of these areas to survey. The 729 areas are then divided into districts of about 300 households each, and each district is divided into clusters of about four dwelling units. Every month, Census Bureau employees call about 15,000 of the four-household clusters, for a total of 60,000 households. Households are interviewed for four consecutive months, then rotated out of the survey for eight months, and then interviewed again for the same four months the following year, before leaving the sample permanently.

Based on this survey, unemployment rates are calculated by state, industry, urban and rural areas, gender, age, race or ethnicity, and level of education. A wide variety of other information is available, too. For example, how long have people been unemployed? Did they become unemployed because they quit, or were laid off, or their employer went out of business? Is the unemployed person the only wage earner in the family? The Current Population Survey is a treasure trove of information about employment and unemployment.

What is the difference between CPS and EPS?

The Current Population Survey (CPS) conducted by the United States Census Bureau measures the percentage of the labor force that is unemployed. The establishment payroll survey (EPS) by the Bureau of Labor Statistics is a payroll survey that measures the net change in jobs created for the month.