Economics Online Tutor
This page includes a description of the method used to compile and calculate the
unemployment rate, an example that shows these calculations, and a brief
discussion regarding the reliability of the official unemployment statistics.

For other topics relating to unemployment, use the links in the left hand column
of this page.

In the United States, the official unemployment statistics are compiled and
published on a monthly basis by the Bureau of Labor Statistics, which is a division
of the Department of Labor.

The Bureau of Labor Statistics compiles these statistics by taking an extensive
survey of U.S. households.  It is this survey that determines the official
unemployment rate and other statistics each month.  Some people mistakenly
believe that the unemployment rate is based on the number of claims for jobless
benefits.  Those numbers are compiled weekly, not monthly, and have nothing to
do with the unemployment statistics.
Unemployment
Statistics
The following example is based on a hypothetical country using this data:

TOTAL POPULATION:
100,000,000
WORKING AGE POPULATION: 75,000,000
RESIDENTS EMPLOYED FULL-TIME: 40,000,000
RESIDENTS EMPLOYED PART-TIME: 15,000,000
NON-EMPLOYED ADULTS ACTIVELY SEEKING EMPLOYMENT: 5,000,000
DISCOURAGED WORKERS: 1,000,000

For the definitions of these and related terms, see the UNEMPLOYMENT MAIN PAGE.
In this example, the number of employed persons is 55,000,000.  For calculating labor statistics, it
doesn't matter whether a person is employed full time or part time.

The number of unemployed persons is 5,000,000.  Only those residents who are not employed
and also are actively seeking work are counted as unemployed.

The total labor force is 60,000,000.  This is the sum of those counted as employed and those
counted as unemployed.

The labor force participation rate is 80%.  This is the percentage of the working age population
that is counted in the total labor force.  In this example, that would be 60,000,000 divided by
75,000,000.

The unemployment rate is 8.33%.  This is the percentage of the total labor force that is counted as
unemployed.  In this example, that would be 5,000,000 divided by 60,000,000.
How reliable are the official unemployment statistics?  The survey conducted by the Bureau of Labor
Statistics is extensive enough to be considered statistically significant, so the numbers should be
reliable.  But they ignore two important categories of citizens: the hidden unemployed, and the hidden
employed.

The hidden unemployed are mentioned above: they include discouraged workers and underemployed
workers.  Discouraged workers are actually unemployed workers who have given up their job search.  
They want to work, but they have determined that nobody will hire them, so they have quit actively
seeking work.  They are considered to be those who have looked for work in the past year, but not within
the past four weeks.  Underemployed workers are those who have jobs but are not using all of their
productive potential.  They are counted as employed, but they would prefer to be doing something more
productive.  This includes part time workers who would prefer to be working full time, and full time
workers who have jobs that do not utilize their particular job skills.

The hidden employed would be workers in the underground economy.  These are people with jobs and
incomes that go unreported.  As a result of not reporting their jobs, they may be counted as unemployed.  
These jobs are unreported for a variety of reasons.  They represent unreported taxable income.  Self
employment or employer / employee taxes are being avoided.  Jobs may be unreported in order to avoid
minimum wage laws or other regulations or reporting requirements.  Income earned as a result of illegal
activity is almost always unreported.  Jobs may be unreported in order to avoid immigration laws.  The
size of the underground economy is often blamed entirely on illegal immigration, but while it is clear that
while many people in the underground economy are illegal immigrants, many others are not.  It is not
clear, however, what the overall size of the underground economy is.
This page, along with additional commentary, was posted on the "Economics Online Tutor"
Facebook page's timeline on
August 23, 2012.
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