The Unemployment Rate Explained

unemployment rateThe national unemployment rate currently sits at 9.7 percent, down from 10 percent the previous month, but almost double what it was five years ago. This means that 14.8 million of the approximately 150 million people who make up the national workforce do not presently have jobs. Sounds simple and straightforward enough on the surface, but there's a lot more too it than you might think. Here are some answers to the key questions.

Q. Who determines the unemployment rate?

A. The Bureau of Labor Statistics (or BLS) is "the principal fact-finding agency for the Federal Government in the broad field of labor economics and statistics." They're in charge of measuring the unemployment rate and related statistical data.

Q. How do they do it?

A. Every month the government conducts a survey of 60,000 households. Within that representative sample, "each person [of working age] is classified according to the activities he or she engaged in during the reference week." Did they work? Did they look for work? There's a whole list of questions that the BLS uses to classify each person in one of the following categories:

  • Employed
  • Unemployed
  • Not in the labor force

(Note that "Respondents are never asked specifically if they are unemployed, nor are they given an opportunity to decide their own labor force status.")

The statisticians then divide the number of unemployed persons by the entire labor force (unemployed people + employed people), and there it is: the unemployment rate. The process involves additional steps along the way to ensure the efficacy of the results. But that's how it's done.

Q. What does it really mean?

A. The meaning of the results is where things get dicey. Few dispute that the figure lacks nuance. But some argue that the unemployment rate isn't a true measure, or even a good measure, of unemployment ... that the actual rate is much higher. Arguments generally come down to how people are classified.

The "Employed" category includes anyone who worked at all. So someone who loses a full-time job but bags groceries one hour per week is considered employed. Never mind that the person can't make a living and for all intents and purposes doesn't have a job. Counting the under-employed as employed rather than unemployed is misleading, and holds down the unemployment rate.

Someone who would like a job but stops looking out of frustration is categorized as "not in the labor force." This scenario was quite common over the last couple years. People wanted to work, but found looking pointless given the dormant job market. So they stopped. Counting these frustrated people as not in the labor force also minimizes the unemployment rate.

Q. Why do national and local unemployment rates differ?

A. Unemployment sits at 9.7 percent for the country, but most people don't look for work nationwide. They confine a job search to a city or maybe a region. And local rates differ wildly. In December of 2009, the unemployment rate was 4 percent in Fargo, N.D., and 27.7 percent in El Centro, Calif.

Q. So what should I take from the unemployment rate?

A. The national rate is a general gauge of the country's economic health, one of many. Combined with other measures-like the "U6," which includes underemployed and discouraged workers (for a rate of 16.2 percent overall last year), the unemployment rate reflects the conditions facing the American worker.

And that worker can reasonably expect the federal government to act accordingly -- meaning such measures as extended unemployment benefits, lower taxes, and broader public work programs during times of high unemployment.

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