Understanding the Unemployment Rate in the US

© 2013 Rick Adamson
By Rick Adamson 9.6.13

The unemployment rate is calculated by tallying up all the people who are currently unemployed and dividing that number by the total number of people in the labor force.  For example,

No. of unemployed

No. of people in the labor force

So it is a simple equation in which the outcome can be affected by either the numerator or the denominator.

The definition of "unemployed" is very specific and means that the person is actively seeking employment but has been unable to land a job (derived by summing up all those receiving unemployment benefits).

The "labor force" consists of the number of Americans who are above the working age and below the retirement age and are employed or are seeking to be employed (derived by telephone surveys). Currently, the labor force represents only 63.2 percent of able bodied workers which is a 35 year low.

So, although the Government would like for you to only look at the monthly final published rate (currently 7.3 percent down from 7.4 percent last month) that’s not the whole story.  The participation rate decreased from 63.4 last month to 63.2 now which is about 300,000 workers.  About 169,000 workers were added to the work force in August so you can see that those dropping out affected the final figure more those getting jobs.

In summary, the decrease in the unemployment rate (between July and August) resulted not because so many people got new jobs but because so many people left the labor force (this has been the case for many months since the recession began).  The unemployment rate is therefore only an indicator.  It has worked well over the years but it becomes distorted in times like these.

For more see Not Looking for Work: Labor-Force Participation Hits 35-Year Low