Wondering what to make of the constant barrage of headlines about the US unemployment rate? While most people gather that a rising percentage is bad, and a declining one better, few understand exactly what information the rate reflects.
Does an unemployment rate of 10% mean that one in 10 Americans isn’t working? Would that mean 30 million of the roughly 300 million US citizens aren’t working?
In a word, no.
The unemployment rate reported by the Bureau of Labor Statistics is the product of a survey that measures the number of unemployed as a fraction of the labor force.
The labor force excludes most people not seeking work – children, retirees, etc. Here are a few myths about what the rate reflects, and a breakdown of exactly what the unemployment rate means.
How are Unemployment Rates Calculated?
Information about unemployment comes from the Bureau of Labor Statistics. Some people believe that the agency uses unemployment benefit claims as an indication of how many people are unemployed. However, these claims don’t offer a true reflection of unemployment numbers.
For one thing, many unemployed individuals delay filing for benefits until they are under financial pressure. For another, many people are still unemployed when their benefits expire. So, using unemployment insurance claims would underestimate the number of unemployed persons.
Others think that BLS counts every unemployed person every month. Where would BLS find the data? They would need to contact every household in the United States. Such a process would be enormously labor intensive!
To work around the limitations of these methods, the government conducts a survey each month of approximately 60,000 households. This survey has occurred every month since 1940, when it began as a project of the Works Project Administration. 60,000 households translates to around 110,000 working individuals, a number significantly larger than the usual 2,000 surveyed in public opinion polls.
To select the households, the Census Bureau groups every county and county-equivalent city into 2,025 geographic groups. A sample of 824 is then selected to represent all states and the District of Columbia. One fourth of the households are changed each month, so that no household is interviewed more than four consecutive months.
Every month, 2,200 Census Bureau employees interview these households to ask questions regarding employment. The first time any household is selected, the interviewer gathers a list of people in the household, including personal characteristics (this includes: date of birth, sex, race, ethnicity, marital status, education, veteran status, and so on) and their various relationships to the head of the household.
The survey gathers information about all household members age 16 and older. Based on their answers to questions, respondents are classified as employed, unemployed, or not in the labor force. To ensure uniformity across interviewers, federal employees conducting the study are given extensive training, including lectures, on the job training, take-home study materials, annual day-long training and review, and supervisor observation.
The survey’s three classifications are defined as follows:
- Employed persons are those with jobs
- Unemployed individuals are those who are jobless, looking for jobs, and available for work
- Those who are neither of the above are considered outside of the labor force
Respondents are also counted as employed if they have a job at which they did not work during the survey period due to vacation, illness, childcare, paternity or maternity leave, an industrial dispute, or if they were prevented from work by bad weather.
People are also counted as employed (specifically as “unpaid family workers”) if they work helping a family business but receive no pay. For example, think of teenagers helping on farms, or homemakers helping at the family store a few times per week.
Persons are considered unemployed if they have no job and are looking for one, by just about any active measure: contacting employers directly, using an employment agency, sending out resumes or applications, checking registers, etc. Those expecting a recall from temporary lay-off are considered unemployed, regardless of whether or not they have engaged in job-seeking activity.
People Outside the Labor Force
The term “outside the labor force” refers to anyone not looking for work, including homemakers not looking for work, retirees, and the disabled. Another term within this group, “marginally attached to the work force,” refers to anyone available for work who has sought work within the past 12 months, would like a job, but has not sought one within the past 4 weeks.
Another subset of the marginally attached, “discouraged workers,” refers to individuals not looking for work because they believe no jobs are available, they had previously been unable to find work, they lack necessary training or skills, or because they perceive discrimination.
After gathering all of this data, the unemployment rate is calculated by dividing the number of unemployed persons by the total number of persons in the workforce. How accurately does this sample reflect the US at large? The Bureau of Labor Statistics website explains the sample’s efficacy this way:
A sample is not a total count, and the survey may not produce the same results that would be obtained from interviewing the entire population. But the chances are 90 out of 100 that the monthly estimate of unemployment from the sample is within about 290,000 of the figure obtainable from a total census. Since monthly unemployment totals have ranged between about 7 and 11 million in recent years, the possible error resulting from sampling is not large enough to distort the total unemployment picture.
So, the unemployment rate reflects the rate discovered in the survey. The numbers of unemployed are estimates based on the survey.
Does the Unemployment Rate Reflect Broader Realities?
Now, some people argue that the official definition of employed does not necessarily reflect our broader economic problems. For example, those forced to work part-time due to economic conditions are considered employed by the survey. But, they might be suffering a reduced standard of living because they cannot find full time work.
Others argue that counting students with part time employment as employed doesn’t really reflect economic reality. With that in mind, the BLS developed other measures of underemployment. Underemployment is a term you’ll see covered elsewhere on Dough Roller.
So, in summary, when the media report the unemployment rate, they are reporting the percentage of people in the labor force who are actively seeking work and unable to find it based on a survey conducted by the Bureau of Labor and Statistics. Not as precise as you might think.