What Everybody Should Know about Unemployment and the Unemployment Rate
Economics Corner: What Everybody Should Know about Unemployment and the Unemployment Rate
It is my observation that when people discuss the unemployment rate, including the validity and importance of the government’s “official” rate of unemployment, the discussions generally involve misconceptions as well as unnecessary speculation.
Contrary to some widely held beliefs…
- The government does NOT hide numbers, such as the number of people who have given up looking for work, the number of people who work part-time because they can’t get a full-time job, etc.
- There is no single percentage, higher than the “official” unemployment rate, which constitutes a “real” unemployment rate
- The unemployment rate is NOT based on the number of people who collect unemployment benefits
- People don’t quit being counted simply because their unemployment benefits have run out
How the Unemployment Rate is Determined
The Bureau of Labor Statistics (BLS), a division of the United States Department of Labor, maintains a vast database of employment statistics. Each month, BLS conducts two statistically significant surveys. One is known as the Household Survey, and the other is known as the Establishment Survey. The unemployment rate is based on data from the Household Survey. The Establishment Survey provides BLS with data regarding the total number of jobs in the economy, as well as the number of jobs in different segments of the economy. On the first or second Friday of each month, BLS issues a press release entitled “Employment Situation Summary,” which includes a summary of statistical results from these two surveys. When news organizations report on the unemployment rate, the number of jobs added to the economy last month, etc., they get their information from this news release. If you want to see the source document, rather than relying on news organizations and others to tell you what is important in the numbers, you can easily look it up for yourself on bls.gov. You might be surprised at the amount of information that is collected and reported in the source document – information in addition to what appears in news headlines. Much of the misinformation being passed around about the unemployment rate is caused by people “assuming” beyond the headlines. The data behind the speculation is readily available and reported along with the numbers in the headlines.
For our purposes, we are concerned with the Household Survey. Each month, BLS commissions a telephone survey of American households. Respondents are asked questions for each household member, such as…
- Do you have a job? (If you answer “yes”, you are counted as employed)
- What is your age? (If you don’t have a job but you are under the age of 16, you are not considered part of the labor force)
- Is any member of the household institutionalized? (People in prisons, mental institutions, etc. are not part of the labor force)
- If you have a job, do you work full-time or part-time? If you work part-time, are you looking for full-time work? (The answers to these questions do not affect the “official” unemployment rate, but they are reported and available to anyone who wonders about them)
- If you do not have a job, do you want one? (If you answer “no”, then you are not counted in the labor force)
- If you do not have a job, but you want one, have you actively looked for work within the past 4 weeks? (If you answer “yes”, you are counted as being unemployed; you have to be actively looking for work in order to be considered unemployed; otherwise, you are not considered to be part of the labor force)
- If you do not have a job, and you haven’t looked for work in the past 4 weeks, have you looked for work at any time in the past 12 months? If so, why did you quit looking? (These people are not counted as part of the labor force, and aren’t part of the “official” unemployment rate, but they ARE counted, and BLS keeps track of discouraged workers, etc.)
The answers given to these types of questions for the Household Survey form the basis for much of the information in the monthly “Employment Situation Summary.” There is no need to speculate on the number of people who have given up looking for work. There is no need to speculate on the number of people who are “underemployed” because they are forced by economic conditions to work part-time. These people are counted, and the numbers are reported along with the “official” unemployment rate.
See the Unemployment page of my Economics Online Tutor website for an example of calculations for the unemployment rate and for an explanation for relevant terminology.
Why Aren’t Discouraged Workers and Underemployed People Counted?
As I mentioned above, they are counted, but they are not included in the “official” unemployment statistics. You might not see these numbers in the news headlines, but they are in the same source document that these news organizations use for their headlines. These numbers are important for many discussions of unemployment. That’s why I encourage people to look at the source. Unfortunately, many people assume the numbers do not exist because they don’t see them in the headlines.
What’s the Difference Between the “Official” Unemployment Rate and the “Real” Unemployment Rate?
There is no such thing as a single “real” unemployment rate. Different measurements for unemployment, including the “official” measurement, give different pieces of information which serve different purposes. The BLS actually calculates six different unemployment rates – U1 through U6 – for different purposes. The “official” rate is U3. The one which yields the highest unemployment rate is U6.
See “What is the Real Unemployment Rate?” for an explanation of why different measurements make sense for different purposes. In other words, no single measurement is the “real” one.
- Are we trying to say that the economy has not recovered as much as the official numbers show?
- Are we trying to compare today with a specific point in the past, perhaps for political reasons?
- Are we trying to say that the economy is operating at far below capacity?
- Are we trying to say that there are more people who are hurting for lack of jobs than what the official numbers indicate?
- Are we trying to say that too few workers are supporting too many "free-loaders"?
There is no single “real” unemployment rate which would be ideal for a discussion of all of these points.
Don’t I Quit Getting Counted as Unemployed if My Benefits Run Out?
Whether or not a person is receiving unemployment benefits is irrelevant to this discussion, other than to point out commonly held misconceptions. The data for the unemployment rate comes from the monthly Household Survey commissioned by the Bureau of Labor Statistics. BLS does not consult any unemployment benefits data, which is maintained on a weekly – not a monthly – basis. Since unemployment benefits have nothing to do with when a person is counted as being unemployed, they have nothing to do with when a person stops being counted. People stop being counted as unemployed when the answers they give on the Household Survey indicate that they no longer meet the definition for being “officially” unemployed.
What Kinds of Policies will Reduce Unemployment?
In order for policies to effectively reduce the unemployment rate in the long run, the policies should address the nature of unemployment. Is unemployment high because of a recession? If so, policies designed to deal with the effects of a recession are the proper policies to use. But if unemployment is high because potential workers don’t have the skill sets which potential employers are looking for, then policies designed to deal with a skill mismatch are the proper policies to utilize.
There is no one-size-fits-all set of policies for dealing with unemployment. It depends on the category of unemployment that is creating real or perceived problems. A discussion of specific policies for each category is far beyond the scope of this essay, but I want to point out the categories of unemployment which will determine which types of policies to use.
Economists have identified four separate categories of unemployment.
Cyclical unemployment: Unemployment rises when the economy goes into a downturn, such as during a recession. This type of unemployment is called cyclical unemployment, so named because it is related to the business cycle. Economists often use the term “natural rate of unemployment” to indicate the level of unemployment which would exist in the absence of an economic downturn. Cyclical unemployment is in addition to this natural rate of unemployment. It might help to know that “natural rate of unemployment” is sometimes referred to as “full employment.” Full employment should not be confused with zero unemployment.
Structural unemployment: This type of unemployment is caused by job-seekers not having the skills necessary to fill open positions. It implies that enough jobs are available in the economy for these job-seekers, but the people who make hiring decisions don’t believe that the job-seekers are qualified for the positions which are available. Structural unemployment is often associated with changes in technology. New technology often requires new job skills, and jobs utilizing older technology are eliminated. Sometimes business owners complain about a “shortage” of workers with necessary skills. A “shortage” in economics indicates that a price has been set too low. Higher wages in this situation would eliminate any real shortage (and presumably eliminate the complaints – yet those who are complaining are the ones with the power to eliminate the shortage). Structural unemployment is considered to be part of the natural rate of unemployment.
Frictional unemployment: This type of unemployment arises from the fact that there is always a time gap between the time when a person without a job starts actively looking for a job, and the time when that person finds a job. In a dynamic economy, many people will fall into this category at any point in time, including the time when the unemployment statistics are compiled. Frictional unemployment is considered to be part of the natural rate of unemployment.
Seasonal unemployment: This is the unemployment caused by the fact that some jobs have busy seasons and slow seasons. During the slow seasons, many workers are laid off, but will be expected to be rehired once the busy season returns. Seasonal unemployment is considered to be part of the natural rate of unemployment.
Structural, frictional, and seasonal unemployment are all considered to be part of the natural rate of unemployment. Some amount of unemployment in these categories is considered to be good for the economy. Unemployment is a necessary part of a growing economy with new technologies, young workers moving into the labor force, and workers being free to test their marketability. It doesn’t make sense to consider the “natural rate of unemployment” to be zero in a market-based economy. Still, it is possible to develop policies which would decrease the number of unemployed people who fall into these categories. For example: better education, job training, and job-matching technology.
Perhaps talk about the economy sounds like a bunch of gibberish to you. But if you had a basic understanding of the terminology being used – not the dictionary definitions, but what the words in their context should mean to a layman – free of misleading political implications, then such talk would mean more to you than just gibberish. The good news is that you don’t have to be an economist or even a student of economics in order to understand the terminology.
“Economics Corner: What Everybody Should Know About…” series is designed as a layman-friendly explanation of important economics terms and concepts. Created by Jerry Wyant.
A version of this essay is included as a chapter in the book Common Misconceptions of Economic Policy by Jerry Wyant. You can purchase this book in paperback form from Amazon and other online book distributors. The list price is $12.99 (only $9.99 using discount code TA9GTK7E when ordering, depending on the distribution channel). Or if you prefer, you can download a digital version on your device (Kindle, Nook, etc.) for $4.99.
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