Politicians on a local, state, and national level have been saying for a while that the unemployment rate is going down overall. But if you’re like me, you’ve seen very little job creation as of late, and you watch the news only to hear about more people who are losing their jobs. So what gives?
What you may not know is how the unemployment rate is calculated. An organization called the Bureau of Labor Statistics calculates the unemployment rate for the United States on a monthly basis, and publishes it on the first Friday of every month. The unemployment rate is calculated by dividing the number in the civilian labor force by the number of unemployed. Seems pretty straightforward, right? Well, lets take a look at some terms, and we’ll see why the unemployment rate doesn’t necessarily correspond with what we see as reality.
Civilian labor force—the civilian labor force includes any civilian who is 16 years or older and who is not institutionalized. Those who are under the age of 16, or who are institutionalized—in prison or a nursing home, for example—are excluded, in addition to those on active duty in the Armed Forces (there’s a good reason as to why those on active duty in the Armed Forces are not included, but I’ll save that for another blog post).
Unemployed—simply not having a job doesn’t mean you’re unemployed. In order to be counted as unemployed, you must 1) not have a job (go figure!), and 2) have actively looked for a job in the past four weeks. You’re also counted as unemployed if you were temporarily laid off. However, if you’ve given up looking for work, you won’t be counted in the unemployment rate. If you’ve worked, or looked for work in the last twelve months, but are not currently employed, you’re considered a “discouraged worker.”
Now it’s easier to see why the unemployment rate seems skewed—discouraged workers aren’t counted.
Another reason that the unemployment rate seems skewed is that it’s what economists call a lagging indicator—meaning that it measures the effect of economic events after they have started. So unemployment rates will begin to rise after a recession begins. They will also continue to rise after the economy has begun to recover.
The unemployment rate should be used in combination with other economic indicators for a more accurate picture of what the economy is doing. For example, if consumers are spending more money on “durable goods,” (expensive items that are expected to last more than three years, and the consumer confidence index, which measures how consumers feel about the economy, are rising, and the unemployment rate is falling, the economy is probably getting better. But the unemployment rate alone is probably not a great indication of the actual state of the economy.
