Measuring unemployment
How the unemployment rate and labour-force participation are measured, and what the official figures miss.
FinanceEveryday economicsAbout 5 min: 3 reading, 2 practiceUpdated
General education, not financial advice.
- Sort adults into employed, unemployed and not in the labour force
- Calculate the unemployment rate and the labour-force participation rate
- Explain the natural rate, cyclical unemployment and the limits of the official rate
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- Everyday economics
- Trade-offs and opportunity cost 5 min
- Thinking at the margin and incentives 5 min
- Models and the circular flow 5 min
- Positive and normative statements 6 min
- Demand and what shifts it 5 min
- Supply, equilibrium and shifts 6 min
- What money is 5 min
- What GDP counts 6 min
- Real and nominal GDP 5 min
- Measuring unemployment 5 min
- The costs of inflation 6 min
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Pairs with any introductory economics textbook; for example N. Gregory Mankiw, Principles of Macroeconomics (6th ed.), chapter 15
What it is
In the US, the Bureau of Labor Statistics surveys about 60,000 households each month and puts each adult (16 and over) into one of three groups:
- Employed: did any paid work, worked in their own business, or worked unpaid in a family business; or has a job but was temporarily away (on holiday or ill, for example). Part-time workers count.
- Unemployed: had no job, was available for work, and had tried to find a job in the past four weeks (or is waiting to be recalled after a lay-off).
- Not in the labour force: everyone else, such as full-time students, people caring for a home, and retirees.
Then:
- Labour force = employed + unemployed.
- Unemployment rate = unemployed ÷ labour force × 100.
- Labour-force participation rate = labour force ÷ adult population × 100.
Mankiw's figures for 2009 (in millions): adult population 235.9; employed 139.9; unemployed 14.3; labour force 154.2; not in the labour force 81.7. So the unemployment rate was 14.3 ÷ 154.2 ≈ 9.3%, and participation 154.2 ÷ 235.9 ≈ 65.4%.
Quick check
Tap an answer to check it.
A full-time student who isn't looking for work: how is she classed?
- Unemployed people must be looking for work
Show answer
Not in the labour force. Only people who are available and looking count as unemployed.
Why it matters
Natural and cyclical unemployment. The natural rate of unemployment is the amount an economy normally has. Cyclical unemployment is the year-to-year swing around it, linked to booms and recessions. Mankiw reports a US Congressional Budget Office estimate of the natural rate in 2009 of 5.0%, far below the actual 9.3%. "Natural" doesn't mean desirable or fixed: policy can change it.
Differences between groups. In Mankiw's 2009 data, teenagers had lower participation and much higher unemployment than adults; Black adults had similar participation to white adults but much higher unemployment; adult women had lower participation than men but somewhat lower unemployment once in the labour force.
What the official rate misses. It is a useful but imperfect measure:
- Discouraged workers would like a job but have given up looking, so they aren't counted as unemployed.
- Some people say they are looking only to qualify for benefits, or are working in the untaxed "underground" economy, which overstates unemployment.
- The broader measures in Mankiw's table also count people stuck in part-time work who want full-time jobs; the official rate counts them as employed.
The BLS publishes broader measures of labour underutilisation to fill some of these gaps.
How long it lasts. Mankiw notes that most spells of unemployment are short, but most unemployment observed at any time is long-term, because the long spells add up.
Worked example
A small country (thousands):
| Group | Number |
|---|---|
| Employed | 4,600 |
| Unemployed | 400 |
| Not in the labour force | 3,000 |
- Labour force: 4,600 + 400 = 5,000.
- Adult population: 5,000 + 3,000 = 8,000.
- Unemployment rate: 400 ÷ 5,000 = 8%.
- Participation rate: 5,000 ÷ 8,000 = 62.5%.
Now 100 of the unemployed give up looking. Unemployed: 300; labour force: 4,900. The unemployment rate falls to 300 ÷ 4,900 ≈ 6.1%, although no one found a job.
Common mistake
Reading every fall in the unemployment rate as good news. It can fall because discouraged people stop looking and leave the labour force, as in the worked example. Check the participation rate too.
Key terms
- labour force
- the employed plus the unemployed
- unemployment rate
- the percentage of the labour force that is unemployed
- labour-force participation rate
- the percentage of the adult population in the labour force
- natural rate of unemployment
- the normal rate of unemployment around which the actual rate moves
- cyclical unemployment
- the deviation of unemployment from its natural rate
- discouraged workers
- people who would like to work but have given up looking
Practise the key terms
Tap a card to turn it over. 6 cards.
| Front | Back |
|---|---|
| labour force | the employed plus the unemployed |
| unemployment rate | the percentage of the labour force that is unemployed |
| labour-force participation rate | the percentage of the adult population in the labour force |
| natural rate of unemployment | the normal rate of unemployment around which the actual rate moves |
| cyclical unemployment | the deviation of unemployment from its natural rate |
| discouraged workers | people who would like to work but have given up looking |
Practice
Work it through
Adult population 50 million; employed 30 million; unemployed 2 million.
- 30 + 2
- 2 ÷ 32 × 100
- 32 ÷ 50 × 100
- 50 − 32
Sort it
Which group does this belong to?
A part-time shop worker
Part-time work countsShow answer
Employed. Part-time work counts
A laid-off engineer applying for jobs
Without work and lookingShow answer
Unemployed. Without work and looking
A retiree
Not looking for workShow answer
Not in the labour force. Not looking for work
Someone who wants a job but has stopped looking
A discouraged workerShow answer
Not in the labour force. A discouraged worker
A worker off sick this week but with a job
Temporarily absent from a jobShow answer
Employed. Temporarily absent from a job
Quick quiz
Tap an answer to check it.
What was the US unemployment rate in 2009, in Mankiw's figures?
- That was the estimated natural rate
Show answer
About 9.3%. 14.3 million unemployed out of a labour force of 154.2 million.
Why can the unemployment rate understate joblessness?
- Students not looking for work are outside the labour force
Show answer
Discouraged workers who have stopped looking aren't counted as unemployed. Only people looking for work count as unemployed.
In short
- Adults are employed, unemployed (without work and looking) or not in the labour force.
- Unemployment rate = unemployed ÷ labour force; participation = labour force ÷ adult population.
- Natural rate: normal unemployment; cyclical: the swing around it.
- The official rate misses discouraged workers and other kinds of underuse.
Mastery check
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Check yourself
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What is the labour force?
Show answer
The employed plus the unemployed.
In Mankiw's 2009 figures, what was the labour-force participation rate?
Show answer
About 65.4% (154.2 ÷ 235.9).
What is cyclical unemployment?
Show answer
The deviation of unemployment from its natural rate.
Further reading
- N. Gregory Mankiw, Principles of Macroeconomics, 6th ed. (South-Western Cengage, 2012), chapter 15.
- On this site: Why unemployment exists.
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