Location:
UNEMPLOYMENT;
Scope:
Background;

OLR Research Report


November 5, 2010

 

2010-R-0421

OLR BACKGROUNDER: BLOOD PRESSURE, BATTING AVERAGES, AND THE UNEMPLOYMENT RATE

By: John Rappa, Chief Analyst

What is the unemployment rate? What does it measure?


The unemployment rate is the share or portion of current and potential workers who are unemployed. Consequently, it is expressed as a percent, but it could also be graphically depicted as a pie chart showing the relative shares of employed and unemployed workers.

Who calculates the rate?

The federal Bureau of Labor Statistics (BLS) calculates the rate by dividing the number of unemployed workers by the total number of employed and unemployed workers. The latter constitutes “the labor force,” and the bureau uses that total to determine the percent of the work force that is unemployed.

Does the bureau ask everyone if they are unemployed and, if so, looking for work?

No, the U.S. Census Bureau surveys a sample of about 60,000 households (about 110,000 people) every month to determine the number of members 16 years or older who worked during the prior week. It selects the sample so that it reflects the general household characteristics across the nation and interviews each household member about their work activities. (see How the Government Measures Unemployment, U.S. Bureau of Labor Statistics,
http://data.bls.gov/cgi-bin/print.pl/cps_htgm.htm
).



To review, BLS determines the rate based on a sample of households and their responses to the Census Bureau
's questions about their employment status. Based on the responses, BLS determines the “labor force,” which includes employed and unemployed people and calculates the percent unemployed.

Why does the bureau include unemployed people in the “labor force?”

The bureau includes unemployed people in the labor force if they intend to find work.

People who tell the bureau they are unemployed but looking and available for work are potentially part of the workforce. Consequently, they are different than those who tell the bureau they are unemployed but not looking for work.

Is it correct that the unemployment rate does not reflect the number of people who are unemployed and not looking for work?

Yes. Let's put this in context. The bureau sorts the household members into three groups based on their responses:

1. members with jobs (the employed);

2. members without jobs but who say they are looking, and available for work; and

3. members without jobs but who say are not looking for work.

The bureau then divides the total for the second group—members without jobs who are looking and available for work—by the totals for this group and those with jobs (i.e., the labor force). The results measure the unemployment for the actual and potential labor force. Here's the formula:

Unemployed and Looking and Available for Work


Unemployment Rate = Employed + Unemployed Looking and Available for Work

Assume there are 100 people who are unemployed and looking for work and 900 people who are employed. The total workforce—employed and unemployed and looking for work—is 1,000. The unemployment rate for this group is 10%.


100 (Unemployed and Looking and Available for Work)
10% = 900 (Employed) + 100 (Unemployed and Looking and Available for Work)

Who comprises “the unemployed and not looking for work” group?

This category includes several different groups, including people most of us would not include in the potential labor force—seniors, full-time students, homemakers, patients, prisoners, and active duty military personnel. But it also includes people who simply stopped looking for work because they say:

1. they do not qualify for the available jobs;

2. they have not found work;

3. they lack the necessary skills, training, and experience for the jobs that are available; or

4. employers discriminate against them for various reasons, including their age.

The bureau refers to these household members as “discouraged workers.”

How does the bureau treat part-time, temporary, and seasonal workers? Are they reflected in the rate?

The bureau includes these workers in the employed group. It also includes in this group people who worked at least 15 hours without pay in a family business or farm and those who work one or two part-time jobs to recover some or all of the income they lost after being laid off.

How do part-time and discouraged workers affect the rate?

The rate would increase if the number of part-time workers were subtracted from the labor force, which is the denominator for calculating the rate. Subtracting these workers from the labor force increases the share of unemployed workers. (The share would increase even more if temporary and seasonal workers were also subtracted from the labor force.) Figure 1 shows how subtracting part-time workers from the labor force affects the rate.

Figure 1: How Part-Time Workers Affect the Rate


The rate would also increase if the total number of part-time workers were not subtracted from the base but added instead to the total unemployed. This adjustment would increase the share of unemployed by increasing the total. The BLS calculates an “alternative labor utilization” rate by adding part-time workers to the unemployed total, plus the other unemployed groups it does not include in the unemployment calculation. The seasonally adjusted rate for the United States in September 2010 was 17.1%, 7.5% higher than the official 9.6% unemployment rate.

But subtracting part-time workers from the base or adding them to the unemployed seems to change the statistic's meaning. After all, part-time workers are employed and working. If the purpose is to show how many people are working part-time, temporary, and seasonal jobs to

make ends meet, then another statistic must be constructed. One way to do that is to calculate a part-time employment rate by dividing the total number of part-time workers by the total number of part-time and full-time ones.

Including discouraged workers—the other group that is not consider unemployed—in the labor force also increases the unemployment rate, as Table 1 shows.

Table 1: Effects of Including Discouraged Workers in the Unemployment Rate

Current Rate Calculation Formula

Modified Formula

Unemployed Looking &

Available for Work

Employed + Unemployed Looking & Available for Work

Unemployed Looking & Available for Work +

Discouraged Workers

Employed+ Unemployed Looking & Available for Work+ Discouraged Workers

Given:

10 unemployed looking & available for work

+90 employed

100 total labor force

Rate: 10/100=10%

Given:

10 unemployed looking & available for work

5 discouraged workers

+90 employed

105 total labor force

Rate: 15 (10+5)/105=14.3%

When BLS added discouraged workers to the unemployed and the labor force, the seasonably adjusted unemployment rate for September 2010 increased from 9.6% to 10.3% (http://data.bls.gov/cgi-bin/print.pl/news.release/empsit.t15htm).

Lastly, what happens to the rate if a large number of unemployed workers either become discouraged or retire?

The rate would drop if a large number of unemployed workers stopped looking for work because they cannot find jobs (i.e., discouraged workers), retired, went back to school, or did any of the other things that meet the bureau's criteria of “unemployed, not in the workforce.” But the rate alone does not show changes in the base that could cause the drop. In fact, some might conclude that a drop in the rate means that businesses are expanding and the economy is growing.

Such conclusions can be tested by looking beyond the rate to changes among the groups the bureau defines to calculate the rate. As Figure 2 shows, the bureau's classification scheme suggests that people cycle through three stages—employed, unemployed and looking for work, and unemployed and not looking for work.

Figure 2: Labor Force Stages

The rate could change if a large number of unemployed workers stopped looking for work and left the labor force. In fact, such a shift kept the U.S. unemployment rate from climbing to 10.4% in December, 2009, according to Bloomberg Businessweek (January 9, 2010). That month, the labor force decreased by over 600,000 workers. The rate could climb to that level or higher if these workers decide to reentry the labor force by telling the Census Bureau they are looking and available for work.

JR:df