The unemployment rate is a measure of how many people are not working out of the total labor force of a given country or population. In the US, people are considered ‘unemployed’ if they have not worked but are actively looking for a job over a period of four weeks. Long term unemployment is defined as not having worked for six months or longer.
The unemployment rate is an indicator of the health of the economy. It is a lagging indicator, meaning that it follows negative economic events, such as the recent coronavirus pandemic. As the economy suffers and jobs are in short supply, the unemployment rate will likely increase.
Unemployment data is collected by the U.S. Bureau of Labor Statistics, based on the monthly Current Population Survey (CPS). The Federal Reserve monitors this indicator to assess the health of the economy and help set monetary policy to change its course. Effecting more than just the unemployed individuals, higher unemployment creates a cascade of far-reaching economic effects due to the lowering of purchasing power and production of goods and services.
This article will help you determine the Unemployment Rate, how to calculate it step by step, and give you examples of how it is applied in decision-making situations.
Unemployment Rate Formula
Unemployment rate= (Unemployed people / Total labor force) × 100
The Unemployment Rate is calculated by dividing the number of people unemployed by the total labor force and then multiplying by 100. This gives the unemployment rate as a percentage.
Unemployment Rate Calculation Step by Step
- Determine the number of people that are unemployed.
The unemployed population only includes those who are actively been looking for work for at least four weeks.
- Determine the quantity of the total labor force.
The total labor force is the aggregate of both the unemployed and the employed population.
- Divide the amount of unemployed by the total labor force and multiply by 100.
Tip: You can find this information from the U.S. Bureau of Labor Statistics website.
Example
In 2020, the U.S. experienced a national health crisis from the coronavirus pandemic, which resulted in a massive exodus of people leaving the workforce due to economic shutdown.
We would like to calculate the average unemployment rate for the entire year of 2020.
Our research at the U.S. Bureau of Labor Statistics gives us the following information:
| Year 2020 | Jan | Feb | Mar | Apr | May | Jun | Jul | Aug | Sep | Oct | Nov | Dec |
| Total Labor Force (‘000) | 164455 | 164448 | 162721 | 156478 | 158200 | 159797 | 160085 | 160818 | 160078 | 160718 | 160536 | 160567 |
| Unemployed (‘000) | 5796 | 5717 | 7185 | 23109 | 20975 | 17697 | 16308 | 13542 | 12535 | 11049 | 10728 | 10736 |
Report Series IDs: LNS11000000 & LNS13000000
To solve Unemployment Rate in January;
5,796164,455
= 0.035 x 100
=3.5%
The Unemployment Rate in January 2020 was 3.5%. Repeat this calculation for the rest of the year;
| Year 2020 | Jan | Feb | Mar | Apr | May | Jun | Jul | Aug | Sep | Oct | Nov | Dec |
| Total Labor Force (‘000) | 164455 | 164448 | 162721 | 156478 | 158200 | 159797 | 160085 | 160818 | 160078 | 160718 | 160536 | 160567 |
| Unemployed (‘000) | 5796 | 5717 | 7185 | 23109 | 20975 | 17697 | 16308 | 13542 | 12535 | 11049 | 10728 | 10736 |
| Unemploy-ment Rate | 3.5% | 3.5% | 4.4% | 14.8% | 13.3% | 11.1% | 10.2% | 8.4% | 7.8% | 6.9% | 6.7% | 6.7% |
The average Unemployment Rate for 2020 can be calculated by adding the Unemployment Rates from each month and dividing by 12. This gives us the average Unemployment Rate of 8.1% over the year 2020 for the United States.
Seasonal Adjustments
It is important to note that unemployment statistics that are reported in the news have been subject to ‘seasonal adjustment’. Seasonal adjustment is a statistical technique that attempts to remove predictable and seasonal trends in order to truly reflect how unemployment is changing. These seasonal events may include such influences as weather, harvests, school vacations, and public holidays.
Measures of Unemployment
In 1976 the Bureau of Labor Statistics unveiled a labor market measurement system, with ratings from U-1 through U-7. This was in response to criticism that the official Unemployment Rate does not accurately represent the true labor market because of its narrow definition of unemployment.
The U-3 measure is the current official measure of the Unemployment Rate. U-6 has the broadest definition, “total unemployed, plus all persons marginally attached to the labor force, plus total employed part-time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force.” This definition accounts for people that are not currently looking for work but have voiced that they want a job. They have been unable to find work for an extensive period, face discrimination or lacking the necessary skills or experience. The U-6 measure is often referred to as the ‘actual’ Unemployment Rate as it includes ‘underemployment’ and gives a better picture of the true state of the economy. In contrast, U-1 only accounts for the proportion of the labor force that has experienced unemployment for 15 weeks or more.
Final Word
Calculating the Unemployment Rate is a valuable skill that goes beyond just statistical reporting. It indicates the state of an overall economy and alerts governments to take action to help avoid recession or depression. The Unemployment Rate can be taken from reports collated by the U.S Bureau of Labor Statistics, by dividing the number of unemployed people by the total labor force. The official U-3 measure of unemployment may underrepresent the true percentage of unemployed people, so it is vital to be conscious of all unemployment categories when making decisions based on this data.
