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Understanding The Unemployment Rate

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The unemployment rate is the percentage of unemployed workers in the total labor force. The economic models utilize the unemployment rate to explain short-term fluctuations and long-term trends, such as job loss and recession. This makes the unemployment rate important as it determines the health of the economy when establishing economic policies.

Discussion Questions

  1. Does the unemployment rate measure labor market strength?
  2. Is unemployment a problem in our country?
  3. Why does it make sense to also consider the employment-to-population ratio?

Related Resources

  • To view the other videos in the Econ 1 series, click here.
  • To view all of the online classwork to Econ 1: Principles of Economics, click here.
View Transcript

To build a model of the overall economy, we need to focus on certain variables, certain macroeconomic variables.

The first one is the unemployment rate. The unemployment rate, of course, is trying to measure how much unemployment is in the economy, how many people are unemployed. It is a particularly precise definition, however, and that is a fraction of the labor force that is unemployed. The labor force itself is defined as the sum of people who are either employed or who are looking for work - so it’s either employed looking for work and then you’re in the labor force.

The measure of employed and looking for work is based on a survey the government has of households around the country. So to be in the labor force you not only have to have a job, which is kind of obvious, but you have to be looking for work and once you add those two together, you get this labor force.

Of course you can imagine just from this example of the government surveyor asking if someone is working or looking for work, its somewhat in the eye of the beholder. For example, you could imagine an older person around 50 or 55 was laid off from a job and it’s been a year or two looking and finally gives up and stays at home. That personal literally drops out of the labor force because they’re not looking for work. They’re not counted in the labor force but you could imagine in some sense, they’re kind of looking for work but they go tired and are doing some other things. So the definition of labor force is somewhat ambiguous but then you have to have something like that in order to properly measure the amount of unemployment in the economy.

Let’s consider an example of people in September 2013 and there are measured people in millions.

So for example in September 2013, there were 246.2 people in an non-institutional population - 16 and over people not in institutions, like jails for example. The labor force at that point (again remember the sum of employed plus looking for work people) was 155.6 million. Of those from the survey, the government was able to determine that 144.3 were employed and 11.3 were unemployed. We know also that 90.6 million were not in the labor force at all. They were part of the population 16 and over but they were neither employed or looking for work. So you get the unemployment rate, and therefore you divide 11.3 by 155.6 million, you get 0.073 and report that as a percentage which is about 7.3%. That’s the unemployment rate.

Sometimes economists also look at a different measure. Just looking at the total amount of employment compared to the population so in this particular case, the total employment is 144.3, the population is 246.2 and ratio of those is 58.6%. That measure is sometimes more useful because it doesn’t rely on this difficult determination about whether someone is in the labor force or not, whether someone is looking for work or not.

These issues could become particularly important in recent years because if it appears that quite a few people have dropped out the labor force because of tough economic times and so they’re not counted as unemployed even though they’ve effectively lost a job and looked for work for a while but are no longer looking and no longer are counted as unemployed so the unemployment rate is probably too low because of that and economist like to at other measure likes employment to population to really get our at least an alternative measure if not a better measure.

So having described how the unemployment rate is calculated, let’s look at what happens to it over time and how that relates to these recession and recoveries that we’ve talked about.

This is a picture of the unemployment rate going back to the 1940s in the Unites States and you can see on the vertical axis we have rates ranging from under 3% in the early 1950s to over 10% in the early 1980s and getting to those high levels again 10% or so in 2007- 2009 recession.

In every recession unemployment rate increases and you can see that quite clear that was a gigantic jump in unemployment. In the most recent period, recession jumped up quite a bit and then the recovery starts to come down.

That’s a pattern which is universal and any model that we have of the economy tries to take that into account as to explain why employment goes up in recession, why do people lose their, what generates this behavior. Also note there’s sort of longer-term trend in unemployment as you look though this is a sort of just kind of going up in this area and it’s coming down in this period of time kind going up again.

On top of these shorter run fluctuations, there’s some longer-term trends in unemployment and the stories that we develop, the model that we developed to explain these has to really try to deal with that phenomena as well. In fact that’s a very important phenomenon and may help you determine whether there’s a problem with economic policy, monetary policy, or fiscal policy. Maybe it could be better, maybe there was something better about it when unemployment had lower trends and something bad when unemployment had higher trends. We need to think about that but these are the material you look at to determine that.