Economic Myths: The Unemployment Rate
Every month, the news headlines proclaim that the unemployment rate is some percent, and many people automatically assume that this is based on an increase (or decrease) in the number or unemployment insurance filings. Many people also assume that the rate is based on the work status of all Americans.
Despite this common myth, the unemployment rate is actually a separate statistic, collected by the U.S. Bureau of Labor Statistics (BLS), separate from unemployment insurance filings. The BLS calculates the rate based on a sampling of the population, using its Current Population Survey (CPS), which is a monthly sample survey of 60,000 households that are representative of the entire U.S population. (Every month, the BLS changes one-quarter of the households in the sample to avoid interviewing any one household more than four consecutive months.) The state-based design of the survey reflects urban and rural areas, different types of industrial and farming areas, and the major geographic divisions of each state.
Understanding the calculation
Let's look at an example. In XYZ town, there are 10 people who are unemployed, 90 who are employed, and 15 who are out of the labor force. What is the unemployment rate?
As a reminder, the calculation is:
So let's plug in the numbers:
But what about the 15 people who are out of the labor force? Remember, the BLS does not include them in the calculation. Let's consider the impact that these individuals could have on the unemployment rate if some of them suddenly decide to reenter the labor market. If five of out-of-the-labor-force people decide to start looking for work because they feel the economy is on the rebound their job options are better, what would the unemployment rate then be?
As a fall 2013 Extra Credit article explained: “The unemployment rate can increase even when the labor market is improving. For example, the unemployment rate rose from 7.5 percent to 7.6 percent in May 2013, but this increase was due to more people entering the labor market.” In the previous example, the number of people in XYZ town did not change, but the labor force participation rate increased and, as a result, the unemployment rate rose.
The student connection
The Classroom Economist. These modules feature videos, lessons in both PowerPoint and SMART Board formats, quizzes, and other content designed to clarify and enhance teacher and student understanding of core economic, personal finance, and Federal Reserve topics, including unemployment.
The Fed Explained. An animated video series that offers a range of content explaining economic concepts—including unemployment, inflation, gross domestic product—and the role of the Federal Reserve System. The use of animation, graphics, and real-life examples helps engage students in the topics.
The Jobs Calculator. This online tool calculates the net employment change needed to achieve a target unemployment rate after a specified number of months. Students can adjust the target unemployment rate, the number of months, and the assumed labor force growth.
Labor Market spider chart. This chart offers real-time tracking of broad labor market developments. Students can compare current conditions to those in the fourth quarters of 2007 (prerecession peak) and 2009 (postrecession employment trough). Indicators of labor market status are broken up into four groups: employer behavior, confidence, utilization, and leading indicators. The data are updated twice a month.
By Jackie Morgan, senior economic and financial education specialist with the Nashville Branch of the Atlanta Fed
January 21, 2014