How Is the Unemployment Rate Calculated?
Uncover the precise methodology and nuances of the unemployment rate calculation.
The unemployment rate is a widely referenced economic indicator, offering insight into the health and stability of a nation’s economy. It gauges the proportion of the labor force that is without work but actively seeking employment. Policymakers, businesses, and individuals alike monitor this figure to understand economic trends and make informed decisions. A low unemployment rate typically signals a robust economy, while a rising rate can indicate economic slowdown or recessionary pressures.
How Data is Gathered
The primary data source for calculating the unemployment rate in the United States is the Current Population Survey (CPS). This extensive household survey is conducted monthly by the U.S. Census Bureau for the Bureau of Labor Statistics (BLS). The CPS collects information from a substantial sample of approximately 60,000 households across the country each month.
The survey accurately represents the civilian noninstitutional population. Interviewers gather details on the employment status of individuals aged 16 and over. Consistent monthly data collection allows for regular updates on labor market conditions.
Categorizing the Population
To determine the unemployment rate, the population is divided into specific categories based on their work status. The civilian noninstitutional population includes persons 16 years and older residing in the 50 states and the District of Columbia. This group excludes individuals in institutional settings, such as prisons or nursing homes, and those on active duty in the Armed Forces.
From this civilian noninstitutional population, the labor force is identified. The labor force comprises all individuals who are either employed or unemployed.
Individuals are employed if they performed any work for pay or profit during the survey’s reference week, even for one hour. This also includes those who worked 15 hours or more as unpaid workers in a family business. Individuals temporarily absent from jobs due to illness, vacation, or bad weather are still counted as employed if they expect to return to their job.
Conversely, persons are unemployed if they did not have a job during the survey reference week, were available for work, and actively looked for employment in the prior four weeks. This category also includes individuals not working but waiting to be recalled from a temporary layoff.
Those neither employed nor unemployed are categorized as not in the labor force. This group includes retirees, students, homemakers, or those unable to work due to disability.
The Calculation Explained
The unemployment rate is calculated using a formula derived from categorized population data. It is determined by dividing the number of unemployed by the total labor force, then multiplying by 100 for a percentage. This calculation provides the official U-3 rate.
For example, if an economy has 95 million employed and 5 million unemployed, the labor force totals 100 million. To calculate the unemployment rate, 5 million unemployed are divided by 100 million in the labor force, yielding 0.05. Multiplying by 100 results in a 5.0 percent unemployment rate.
Additional Measures and Interpretations
While the U-3 rate provides a standard measure, it does not capture all aspects of labor underutilization. Discouraged workers desire a job but have ceased actively looking for work, believing no suitable jobs are available. They are not included in the official unemployment rate because they have not searched for work in the prior four weeks.
Underemployment refers to individuals working part-time for economic reasons. These are people who prefer and are available for full-time employment but can only find part-time work. Although working and counted as employed in the official U-3 rate, their desire for more work hours indicates labor underutilization.
To offer a more comprehensive view, the BLS publishes several alternative measures of labor underutilization, ranging from U-1 to U-6. These measures capture broader job market challenges. For example, the U-6 rate is the broadest measure, encompassing all unemployed, plus discouraged workers and those employed part-time for economic reasons.