The unemployment rate is one of the most closely followed indicators used by businesses, investors, and others to gauge the state of the U.S. economy. Investor sentiment and consumer confidence have strong inverse relationships with the percentage of unemployed Americans.
When the unemployment rate rises, investors guard their money more closely, and consumers become reticent, fearing economic calamity. When the rate is low, people are more confident about the economy, and it shows in their investing and spending patterns.
Key Takeaways
- Unemployment is measured through the Current Population Survey, conducted monthly by the Bureau of Labor Statistics.
- Only residents who are in the labor force are counted in the unemployment rate; those who have given up looking for a job are not—a controversial position.
- Critics argue that not counting workers who have given up looking paints a brighter picture of unemployment than really exists.
Bureau of Labor Statistics Survey
Despite what many people believe, the unemployment rate is not measured by calculating the number of people collecting unemployment insurance. In fact, the government comes up with this much-anticipated number each month by following a process that more closely resembles the U.S. Census.
The unemployment rate is measured by a division of the Department of Labor known as the Bureau of Labor Statistics or BLS. This government agency conducts a monthly survey called the Current Population Survey that involves 60,000 households. These households are selected using random sampling methods designed to generate as close an approximation as possible to the larger population.
The number of households in the sample may seem small, especially when compared to the greater than 333 million people who live in the U.S. Still, it is actually quite large compared to most public opinion surveys, which usually feature 1,000 or so participants, sometimes even fewer. Each month, U.S. Census employees contact the households in the sample and ask specific questions to determine employment status.
3.5%
The U.S. unemployment rate as of September 2022, which is a decrease from 3.7% in August 2022.
The first piece of information they want to determine is how many people in the household are actually in the labor force, meaning these people have jobs or are actively looking for jobs. Only residents who are in the labor force are counted in the unemployment rate. Someone who does not have a job but claims they are not looking for one is considered out of the labor force and is not counted in the unemployment rate. Economists call members of this group “discouraged workers.”
For example, suppose that during a given month, the BLS gathers information on a total of 100,000 people from the 60,000 survey households. A total of 25,000 of those people claim they do not have a job and are not actively looking for one. These people are classified as not in the labor force. They are not counted toward the unemployment rate.
The remaining 75,000 people claim to be active members of the labor force, either because they have a job or they are actively looking for one. Of those respondents, 70,000 are gainfully employed, while the other 5,000 are unemployed but looking for work. Therefore, 93.3% of respondents in the labor force are employed; the remaining 6.7% are considered unemployed. The official unemployment rate for that month is 6.7%.
Survey Controversy
Continuing with the example above, though there are an additional 25,000 unemployed people in the survey because they are considered out of the labor force, they do not count as jobless as far as the official unemployment rate is concerned.
This is a controversial issue, as many feel the unemployment rate excludes a large number of people who are out of the labor force, not because they do not want a job, but because they have simply given up looking. Therefore, some people argue the unemployment rate paints a brighter picture than reality.
There are actually six different unemployment rates that measure various levels of employment. These can be used to give a clearer assessment of the labor market from different perspectives.
How Does the U.S. Determine the Unemployment Rate?
The U.S. determines the unemployment rate by dividing the unemployed individuals by the total number of individuals in the labor force. This is then converted into a percentage. How the U.S. determines the “labor force” and “unemployed” varies. The labor force, for example, only includes those who are employed or unemployed and seeking employment.
Who Is Not Counted in the Unemployment Rate?
Those individuals who are unemployed and have not looked for work in the past four weeks are not counted in the unemployment rate. In the U.S., the unemployment rate only takes into consideration those in the labor force, which are people that are working or not working but actively seeking work.
What Are the 4 Types of Unemployment?
The four types of unemployment are frictional, cyclical, structural, and institutional. Frictional is short-term; when people leave jobs for new jobs. Cyclical deals with changes in the economy, such as when the economy or some industries experience upturns or downturns. Structural is when there is a fundamental change in the structure of how society operates. Such as machines replacing workers in a factory. Institutional refers to changes in institutional factors and incentives in the economy.
The Bottom Line
The U.S. Bureau of Labor Statistics uses the Current Population Survey to estimate the unemployment rate. The unemployment rate takes into consideration only those in the labor force; those working or those not working but actively looking for a job. Many critics believe this underestimates the true unemployment rate. The Bureau of Labor Statistics has six different unemployment rates to take into consideration the varying degrees of unemployment.