The Unemployment Rate: Computing It and Reading It
- Compute the unemployment rate and the labor force participation rate
- Classify individuals as employed, unemployed or out of the labor force
- Explain why discouraged workers cause the unemployment rate to understate joblessness
Three boxes, and the denominator problem
Everyone 16 and over goes in exactly one of three boxes. Employed: did any paid work in the reference period, including part-time. Unemployed: not working, available for work, and actively looked in the last four weeks. Not in the labor force: everyone else — retirees, full-time students, homemakers, and the discouraged. The labor force is employed plus unemployed, and it is the denominator of the unemployment rate. People not in the labor force are in neither the numerator nor the denominator, and that is the source of every trap in this topic.
Why a falling rate can be bad news
A discouraged worker stops looking after a long unsuccessful search. That moves them out of the unemployed box and out of the labor force — shrinking both the numerator and the denominator, but the numerator by proportionally more. The unemployment rate falls, though nobody found a job. This is why the labor force participation rate must be read alongside it: a falling unemployment rate with falling participation is a discouragement story, while a falling rate with steady participation is genuine improvement.
Three kinds of unemployment, and the one that never goes away
Frictional unemployment is people between jobs or entering the market — short-term, and a sign of a functioning economy where people can move. Structural unemployment is a mismatch between the skills workers have and the skills employers need, often from technology or trade; it is longer-lasting and needs retraining rather than stimulus. Cyclical unemployment moves with the business cycle and is the only kind fiscal and monetary policy can address. Frictional plus structural is the natural rate, and full employment means cyclical unemployment is zero — not that unemployment is zero.
A country has 250,000 adults: 140,000 employed, 10,000 actively seeking work, 20,000 who stopped looking after months of searching, and the rest retired or in school. Compute the unemployment rate and the labor force participation rate.
- 1.The 20,000 who stopped looking are discouraged workers — not in the labor force.
- 2.Labor force = 140,000 employed + 10,000 unemployed = 150,000.
- 3.Unemployment rate = 10,000 / 150,000 × 100 = 6.7%.
- 4.LFPR = 150,000 / 250,000 × 100 = 60.0%.
- 5.If the 20,000 were counted as unemployed, the rate would be 30,000/170,000 = 17.6% — a very different picture.
A part-time worker who wants full-time hours is counted as fully employed. So is someone working one hour a week. Underemployment does not appear in the headline rate at all, which is another reason it understates labor-market slack.
A country has 90,000 employed, 10,000 unemployed and 50,000 adults not in the labor force. The unemployment rate is:
Thousands of unemployed workers give up searching. Holding employment constant, the unemployment rate:
A textile worker loses her job permanently when the industry automates. Her unemployment is best classified as:
Read the denominator in the question before computing. "Unemployment rate" and "labor force participation rate" differ only in what they divide by, and swapping them is the most common arithmetic loss in this unit.
Answer the 3 checkpoints as you read.
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