8.1How Economists Define and Compute Unemployment Rate

people are employed or actively searching for work—declined and as of early-2022 remained lower than it was in 2019. Some were forced to stop working because of school and childcare closures. Others were concerned about how safe their workplaces would be in the middle of a global pandemic. And still others simply chose to retire early. Labor force participation remains a sore spot in the labor market's recovery. These two statistics—unemployment and labor force participation—show how complicated the labor market can be. As the unemployment rate declined through 2021, the disappointing statistics on labor force participation show weak points. One day you may have read a headline about how easy it was to find a job, and the next day a headline would describe how difficult it was for employers to find workers. By the end of this chapter, you will be in a much better position to make sense of these events. Unemployment can be a terrible and wrenching life experience—like a serious automobile accident or a messy divorce—whose consequences only someone who has gone through it can fully understand. For unemployed individuals and their families, there is the day-to-day financial stress of not knowing from where the next paycheck is coming. There are painful adjustments, like watching your savings account dwindle, selling a car and buying a cheaper one, or moving to a less expensive place to live. Even when the unemployed person finds a new job, it may pay less than the previous one. For many people, their job is an important part of their self worth. When unemployment separates people from the workforce, it can affect family relationships as well as mental and physical health. The human costs of unemployment alone would justify making a low level of unemployment an important public policy priority. However, unemployment also includes economic costs to the broader society. When millions of unemployed but willing workers cannot find jobs, economic resource are unused. An economy with high unemployment is like a company operating with a functional but unused factory. The opportunity cost of unemployment is the output that the unemployed workers could have produced. This chapter will discuss how economists define and compute the unemployment rate. It will examine the patterns of unemployment over time, for the U.S. economy as a whole, for different demographic groups in the U.S. economy, and for other countries. It will then consider an economic explanation for unemployment, and how it explains the patterns of unemployment and suggests public policies for reducing it.

8.1 How Economists Define and Compute Unemployment Rate

LEARNING OBJECTIVES By the end of this section, you will be able to:

• Calculate the labor force participation rate and the unemployment rate
• Explain hidden unemployment and what it means to be in or out of the labor force
• Evaluate the collection and interpretation of unemployment data

Newspaper or television reports typically describe unemployment as a percentage or a rate. A recent report might have said, for example, from September 2021 to October 2021, the U.S. unemployment rate declined from 4.8% to 4.6%. At a glance, the changes between the percentages may seem small. However, remember that the U.S. economy has about 162 million adults (as of the beginning of 2022) who either have jobs or are looking for them. A rise or fall of just 0.1% in the unemployment rate of 162 million potential workers translates into 160,000 people, which is roughly the total population of a city like Syracuse, New York, Brownsville, Texas, or Pasadena, California. Large rises in the unemployment rate mean large numbers of job losses. In April 2020, at the peak of the pandemic-induced recession, over 20 million people were out of work. Even with the unemployment rate at 4.2% in November 2021, about 7 million people who were looking for jobs were out of work. LINK IT UP The Bureau of Labor Statistics (https://openstax.org/l/BLS1) tracks and reports all data related to unemployment.

Who’s In or Out of the Labor Force?

Should we count everyone without a job as unemployed? Of course not. For example, we should not count children as unemployed. Surely, we should not count the retired as unemployed. Many full-time college students have only a part-time job, or no job at all, but it seems inappropriate to count them as suffering the pains of unemployment. Some people are not working because they are rearing children, ill, on vacation, or on parental leave. The point is that we do not just divide the adult population into employed and unemployed. A third group exists: people who do not have a job, and for some reason—retirement, looking after children, taking a voluntary break before a new job—are not interested in having a job, either. It also includes those who do want a job but have quit looking, often due to discouragement due to their inability to find suitable employment. Economists refer to this third group of those who are not working and not looking for work as out of the labor force or not in the labor force. The U.S. unemployment rate, which is based on a monthly survey carried out by the U.S. Bureau of the Census, asks a series of questions to divide the adult population into employed, unemployed, or not in the labor force. To be classified as unemployed, a person must be without a job, currently available to work, and actively looking for work in the previous four weeks. Thus, a person who does not have a job but who is not currently available to work or has not actively looked for work in the last four weeks is counted as out of the labor force. Employed: currently working for pay Unemployed: Out of work and actively looking for a job Out of the labor force: Out of paid work and not actively looking for a job Labor force: the number of employed plus the unemployed

Calculating the Unemployment Rate

Figure 8.2 shows the three-way division of the 16-and-over population. In November 2021, about 61.8% of the adult population was "in the labor force"; that is, people are either employed or without a job but looking for work. We can divide those in the labor force into the employed and the unemployed. Table 8.1 shows those values. The unemployment rate is not the percentage of the total adult population without jobs, but rather the percentage of adults who are in the labor force but who do not have jobs:

FIGURE 8.2Employed, Unemployed, and Out of the Labor Force Distribution of Adult Population (age 16 and older), November 2021The total adult, working-age population in November 2021 was 262.029 million. Out of this total population, 155.175 million were classified as employed, and 6.877 million were classified as unemployed. The remaining 99.977 million were classified as out of the labor force. As you will learn, however, this seemingly simple chart does not tell the whole story. As you will learn, however, this seemingly simple chart does not tell the whole story. Total adult population over the age of 16 262.029 million In the labor force 162.052 million (61.8%) Employed 155.175 million Unemployed 6.877 million Out of the labor force 99.977 million (38.2%) TABLE 8.1U.S. Employment and Unemployment, November 2021 (Source: https://data.bls.gov) In this example, we can calculate the unemployment rate as 6.877 million unemployed people divided by 162.052 million people in the labor force, which works out to a 4.2% rate of unemployment. The following Work It Out feature will walk you through the steps of this calculation. WORK IT OUT Calculating Labor Force Percentages How do economists arrive at the percentages in and out of the labor force and the unemployment rate? We will use the values in Table 8.1 to illustrate the steps. To determine the percentage in the labor force: Step 1. Divide the number of people in the labor force (162.052 million) by the total adult (working-age) population (262.029 million). Step 2. Multiply by 100 to obtain the percentage. To determine the percentage out of the labor force: Step 1. Divide the number of people out of the labor force (99.977 million) by the total adult (working-age) population (262.029 million). Step 2. Multiply by 100 to obtain the percentage. To determine the unemployment rate: Step 1. Divide the number of unemployed people (6.877 million) by the total labor force (165.052 million). Step 2. Multiply by 100 to obtain the rate.

Hidden Unemployment

Even with the “out of the labor force” category, there are still some people who are mislabeled in the categorization of employed, unemployed, or out of the labor force. There are some people who have only part time or temporary jobs, and they are looking for full time and permanent employment that are counted as employed, although they are not employed in the way they would like or need to be. Additionally, there are individuals who are underemployed. This includes those who are trained or skilled for one type or level of work but are working in a lower paying job or one that does not utilize their skills. For example, we would consider an individual with a college degree in finance who is working as a sales clerk underemployed. They are, however, also counted in the employed group. All of these individuals fall under the umbrella of the term “hidden unemployment.” Discouraged workers, those who have stopped looking for employment and, hence, are no longer counted in the unemployed also fall into this group.

Labor Force Participation Rate

Another important statistic is the labor force participation rate. This is the percentage of adults in an economy who are either employed or who are unemployed and looking for a job. Using the data in Figure 8.2 and Table 8.1, those included in this calculation would be the 162.052 million individuals in the labor force. We calculate the rate by taking the number of people in the labor force, that is, the number employed and the number unemployed, divided by the total adult population and multiplying by 100 to get the percentage. For the data from November 2021, the labor force participation rate is 61.8%. Historically, the civilian labor force participation rate in the United States climbed beginning in the 1960s as women increasingly entered the workforce, and it peaked at just over 67% in late 1999 to early 2000. Since then, the labor force participation rate has steadily declined, slowly to about 66% in 2008, early in the Great Recession, and then more rapidly during and after that recession. The labor force then climbed slowly during the 2010s but declined again during the pandemic in March–April 2020 and remained lower than pre-pandemic levels as of early 2022.

The Establishment Payroll Survey

When the unemployment report comes out each month, the Bureau of Labor Statistics (BLS) also reports on the number of jobs created—which comes from the establishment payroll survey. The payroll survey is based on a survey of about 147,000 businesses and government agencies throughout the United States. It generates payroll employment estimates by the following criteria: all employees, average weekly hours worked, and average hourly, weekly, and overtime earnings. One of the criticisms of this survey is that it does not count the self-employed. It also does not make a distinction between new, minimum wage, part time or temporary jobs and full time jobs with “decent” pay.

How Does the U.S. Bureau of Labor Statistics Collect the U.S. Unemployment Data?

The unemployment rate announced by the U.S. Bureau of Labor Statistics on the first Friday of each month for the previous month is based on the Current Population Survey (CPS), which the Bureau has carried out every month since 1940. The Bureau takes great care to make this survey representative of the country as a whole. The country is first divided into 3,137 areas. The U.S. Bureau of the Census then selects 729 of these areas to survey. It divides the 729 areas into districts of about 300 households each, and divides each district into clusters of about four dwelling units. Every month, Census Bureau employees call about 15,000 of the four- household clusters, for a total of 60,000 households. Employees interview households for four consecutive months, then rotate them out of the survey for eight months, and then interview them again for the same four months the following year, before leaving the sample permanently. Based on this survey, state, industry, urban and rural areas, gender, age, race or ethnicity, and level of education statistics comprise components that contribute to unemployment rates. A wide variety of other information is available, too. For example, how long have people been unemployed? Did they become unemployed because they quit, or were laid off, or their employer went out of business? Is the unemployed person the only wage earner in the family? The Current Population Survey is a treasure trove of information about employment and unemployment. If you are wondering what the difference is between the CPS and EPS, read the following Clear it Up feature. CLEAR IT UP What is the difference between CPS and EPS? The United States Census Bureau conducts the Current Population Survey (CPS), which measures the percentage of the labor force that is unemployed. The Bureau of Labor Statistics' establishment payroll survey (EPS) is a payroll survey that measures the net change in jobs created for the month.

Criticisms of Measuring Unemployment

There are always complications in measuring the number of unemployed. For example, what about people who do not have jobs and would be available to work, but are discouraged by the lack of available jobs in their area and stopped looking? Such people, and their families, may be suffering the pains of unemployment. However, the survey counts them as out of the labor force because they are not actively looking for work. Other people may tell the Census Bureau that they are ready to work and looking for a job but, truly, they are not that eager to work and are not looking very hard at all. They are counted as unemployed, although they might more accurately be classified as out of the labor force. Still other people may have a job, perhaps doing something like yard work, child care, or cleaning houses, but are not reporting the income earned to the tax authorities. They may report being unemployed, when they actually are working. Although the unemployment rate gets most of the public and media attention, economic researchers at the Bureau of Labor Statistics publish a wide array of surveys and reports that try to measure these kinds of issues and to develop a more nuanced and complete view of the labor market. It is not exactly a hot news flash that economic statistics are imperfect. Even imperfect measures like the unemployment rate, however, can still be quite informative, when interpreted knowledgeably and sensibly. LINK IT UP Click here (https://openstax.org/l/BLS_CPS) to learn more about the CPS and to read frequently asked questions about employment and labor.

8.2 Patterns of Unemployment

LEARNING OBJECTIVES By the end of this section, you will be able to:

• Explain historical patterns of unemployment in the U.S.
• Identify trends of unemployment based on demographics
• Evaluate global unemployment rates

Let’s look at how unemployment rates have changed over time and how various groups of people are affected by unemployment differently.

Simpler explanation — Cambridge AS & A Level Economics

unemployment The level of unemployment refers to the total number of workers who are unemployed. In contrast, the unemployment rate is the number of unemployed people as a percentage of the labour force. For example, using the formula for the unemployment rate, in an economy with a labour force of 50 million workers, 4.3 million of whom are unemployed, the rate of unemployment is 8.6%: Unemployment rate = Number of people unemployed Number of people in the labour force × 100 The level and rate of unemployment may move in the same direction. This, however, is not always the case. If the labour force increases by a greater percentage than the level of unemployment, the unemployment rate will fall.

For instance, if the labour force is initially 40 million with 2 million unemployed, the unemployment rate would be 5%. If the labour force rises to 44 million and the level of unemployment increases to 2.1 million, the unemployment rate would fall to 4.8%. As well as measuring the unemployment rate, governments also measure the employment rate and the labour force participation rate. The employment rate and the unemployment rate do not add up to 100%. This is because the employment rate is the proportion of the working age population who are in work and not the proportion of the labour force in work.

Using the CIA World Factbook (economy and people and society sections), compare the unemployment rate, the number of people unemployed and the labour force participation rate in your country and another country. Note that you will have to calculate the number of people unemployed and the labour force participation rate from figures in the sections mentioned. Produce a poster to show your figures. You could present the figures in a number of ways, for example in bar charts and pictograms. A pictogram uses simplified pictures or symbols to show statistical data.