Understanding the Unemployment Rate

The unemployment rate is a typical measure of the strength of the economy. Here's a look at the types of unemployment, how they're calculated, and real unemployment rates.

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The unemployment rate represents the number people in the United States who want a job, but are currently without work. The Bureau of Labor Statistics (BLS) calculates the unemployment rate by dividing the labor force by the number of people unemployed. The BLS compares monthly unemployment rates to the same month last year to gauge a rise or fall in unemployment.

To calculate the unemployment rate, the BLS uses a reference week. This week is the week of the month that includes the 12th. For example, in May 2009, the reference week is the 3rd week of the month, which begins with Sunday, May 10 and goes through Saturday, May 16.

The labor force is the total of all both employed and unemployed people. The unemployment rate is calculated as the percentage of unemployed people in the labor force.

Types of Unemployment

The official unemployment rate is calculated based on people who are not employed during the reference week who actively looked for a job during the last four weeks, and who were able to work if called on. It also includes people who were laid off but waiting to be recalled back to work even though they don’t have to look for work to be considered unemployed.

Different unemployment rate calculations include marginally attached workers. These are workers who actively want to be employed and have recently looked for work, but aren’t currently looking for one reason or another. It could be that they are ill or do not have proper childcare.

A subset of marginally attached workers are discouraged workers. These workers want to be employed but aren’t looking specifically because they believe their job search efforts will be in vain. In other words, they’ve become discouraged from job searching.

Part-time workers who would like to work full-time, but have to settle for part-time work.

Employed workers are those who worked for some type of pay during the reference week. It also includes people who worked more than at least 15 hours with or without pay in a family business or farm, and those who were temporarily absent from a job.

Calculating Unemployment

What the government considers unemployed and what many regular people consider unemployed are different things. The BLS published six different unemployment measures.

U-1: People who have been unemployed more than 15 weeks as a percentage of the labor force. This metric helps gauge the unemployment rate for people who have been without a job long enough to cause severe financial loss.

U-2: People who lost their jobs involuntarily or completed temporary assignments. Because this type of job loss is often unexpected it is thought to cause a larger loss of income.

U-3: The official unemployment rate, includes unemployed individuals described above.

U-4: Total unemployed individuals plus discouraged workers (those over 18 who are without work and not looking for work) as a percentage of the labor force adjusted to include discouraged workers.

U-5: Total unemployed, discouraged workers, and marginally attached workers as a percentage of the labor force including discouraged and marginally attached workers.

U-6: Includes the unemployed, marginally attached workers, and part-time workers. This calculation is considered the real unemployment rate because it includes the general populations idea of
unemployment.

The Real Unemployment Rate

The real unemployment rate is always higher than the widely-reported official unemployment rate. Since the real unemployment rate isn’t as frequently quoted, citizens may not have a true idea of the employment situation. For example, in May 2009, the official unemployment rate was 9.4%. The real unemployment rate was 16.4%, nearly double that of the official unemployment rate.

The unemployment rates are an economic factor that helps gauge the country’s growth rate. It’s also utilized to measure the effects of a recession. However, unemployment rate can’t be used to gauge the end of a recession because it’s a lagging indicator.