How to Calculate the Unemployment Rate
The unemployment rate formula is the number of unemployed people in the country divided by the total number of workers available in the civilian labor force. The U.S. Bureau of Labor Statistics has a specific definition of “unemployed” for determining this percentage.
The U.S. unemployment rate by year shows the rate in December of each year. It gives a broad-brush review of how bad unemployment was in that 12-month period. The unemployment rate has twice exceeded 10% at year’s end. It reached from 14% to 24.8% during the Great Depression, and it was in the double-digits between 1931 and 1940 as well.1
How Do You Calculate the Unemployment Rate?
The standard unemployment rate equals the number of unemployed workers divided by the available civilian labor force at any given point in time.
The “real” unemployment rate includes those who are working part-time but would prefer full-time work.3 Many people feel that this is the true unemployment rate because it counts everyone who would take a full-time job if a job were offered. It’s an effective way of really measuring the slack in the labor force.
Unemployed individuals can fall into one of three categories:
- Long-term unemployed: This includes people who have been looking for a job for at least the past four weeks and been without a job for 27 weeks or more.4
- Marginally attached to the labor force: This includes those who haven’t looked for work in the past four weeks but have looked sometime in the past year.5
- Discouraged workers: These workers have looked for work in the past year, but not in the past four weeks so they’re no longer counted as unemployed. But discouraged workers would still like to have a full-time job. They just feel they’re too old, don’t have the right skills, or will continue to face discrimination.6
Another use for the unemployment rate is to calculate the misery index. This is the combination of the unemployment rate and inflation.
Factors Affecting the Unemployment Rate
The unemployment rate has improved since the Depression. One reason is that the government knows more about preventing it. Research reveals that the most cost-effective unemployment solutions are jobs programs.
These programs create more jobs than tax cuts. Also, extended unemployment benefits are the best way to boost the economy. The unemployed are most likely to spend those benefits on day-to-day needs, putting each dollar back into the economy and boosting growth.
Unemployment Rate vs. Labor Force Participation Rate
The labor force participation rate is similar to the unemployment rate. The only difference is that it takes the number of employed and divides it by the civilian population to find the labor force participation rate.6
Types of Unemployment
The natural rate of unemployment is healthy for an economy and includes three components:7
- Frictional unemployment accounts for voluntary job turnover, such as when people quit a job they don’t like to get a better one.
- Structural unemployment occurs when job skills no longer match any new jobs available.8 That’s usually caused by, and also leads to, long-term unemployment.
- Classical unemployment is caused by wage and price controls, minimum wage laws, and unions.
Cyclical unemployment is the type the media talks about most. It rises dramatically during the contraction phase of the business cycle. A recession has already started by the time it takes off because unemployment is a lagging indicator. Companies wait until they’re sure demand won’t come back before laying off their workers.9
- The unemployment rate formula is the number of unemployed workers divided by the available civilian labor force at that time.
- A worker must be older than age 16 and have been able and available to work full-time in the last four weeks to be considered unemployed by BLS standards.
- The U.S. unemployment rate has twice exceeded 10% at year’s end: during the Great Depression and again from 1931 through 1940.
- Cyclical unemployment rises dramatically during the contraction phase of the business cycle, and this is the rate that the media often refers to.
- U.S. Bureau of Labor Statistics. “Labor Force, Employment, and Unemployment, 1929-39: Estimating Methods.” Accessed Sept. 4, 2020.
- U.S. Bureau of Labor Statistics. “Employment Situation Summary: August 2020.” Accessed Sept. 4, 2020.
- U.S. Bureau of Labor Statistics. “Table A-15. Alternative Measures of Labor Underutilization.” Accessed Sept. 4, 2020.
- The Brookings Institution. “Long-Term Unemployment: Anatomy of the Scourge.” Accessed Sept. 4, 2020.
- U.S. Bureau of Labor Statistics. “Labor Force Characteristics.” Accessed Sept. 4, 2020.
- U.S. Bureau of Labor Statistics. “Glossary.” Accessed Sept. 4, 2020.
- CFI Education Foundation. “What Is NAIRU?” Accessed Sept. 4, 2020.
- Organisation for Economic Co-operation and Development. “Structural Unemployment.” Accessed Sept. 4, 2020.
- CFI Education Foundation. “What Is Cyclical Unemployment?” Accessed Sept. 4, 2020.
Source: The Balance