Understanding Unemployment Rates by Omkar Abhyankar

 Unemployment rates are statistics which are prominent in discussions about the health of an economy and how it is performing. However, this statistic is often misinterpreted since it can be blurred as to who is considered to be unemployed and who is not. Let’s explore the process of calculating the unemployment rate of an economy. An organization known as “The Bureau of Labor and Statistics” is an official association of the United States tasked to collect statistics on how economies around the world are performing. They collect the statistics necessary to calculate the unemployment rate in each economy. First the Bureau records the total population of the economy. Next, the Bureau determines how much of the population has the ability to work. According to the Bureau, people of the age 16 or older are considered to have the ability to work. Therefore the population of people 16 and older within the economy are labeled as the “working age population”. After recording the working age population, the Bureau determines how much of the working age population are actually working or actively looking for work. These people are labeled as part of the “labor force”. The labor force is made up of two different groups of people, the employed and the unemployed. The employed consists of the people who currently have a job while the unemployed consists of the people who do not currently have a job but are actively looking for one. The Bureau records the number of people employed and unemployed. It is important to note that people not looking for a job are not considered to be unemployed and are not part of the labor force. Therefore, people who have retired or have become discouraged from searching for another job are not considered to be unemployed since they are not looking to be employed. To receive a more visual view of who exactly is considered to be unemployed, let’s look at the diagram below.

Let’s interpret this diagram. All people in an economy are part of the total population. Within that population, there is a working age population consisting of those over the age of 16. Within that working age population, there is the labor force population consisting of the people who have a job or are actively looking for one. Lastly, the labor force population is made up of the employed and the unemployed.

Once the Bureau has recorded the number of people unemployed, they can now calculate the unemployment rate. To calculate the unemployment rate, the bureau must determine what percentage of the labor force is unemployed. This is done by using the following formula:

For a quick example, suppose we have 200 people unemployed and 500 people in the labor force in an economy. Using the formula, we would get an unemployment rate of 40%.

Using this formula, we can also predict how the unemployment rate will change due to a change in the number of people unemployed or a change in the labor force population. From the formula, we know that the number of people in the labor force is in the denominator. Therefore increasing the labor force population will cause a decrease in the unemployment rate and decreasing the labor force population will cause an increase in the unemployment rate. Since the number of people unemployed is in the numerator, an increase in the number of people unemployed will cause an increase in the unemployment rate while a decrease in the number of people unemployed will cause a decrease in the unemployment rate.

In the next article, we will dive deeper into unemployment and understand the different causes of unemployment.