The unemployment rate is a variable that economists routinely use to measure the health of the economy.
However, some people think the federal unemployment rate doesn’t accurately reflect reality. In fact, the real rate of unemployment may actually be much higher than what’s reported.
The state and federal governments calculate unemployment differently. States often measure unemployment by the number of people receiving unemployment benefits. But that, of course, can be misleading since unemployment benefits expire, leaving the unemployed without a way to be measured.
The federal U.S. government, which releases the ubiquitous “unemployment rate” our country focuses on, uses a calculation to measure how many people are unemployed, though this measurement is also flawed.
How Is the Unemployment Rate Calculated?
Surveyors from the Bureau of Labor Statistics (BLS) visit 60,000 households every month and ask a number of questions to determine someone’s employment status. If someone works full-time, part-time, or is self-employed, they are considered employed. If someone does not have a job of any kind, but has been looking for one for the past four weeks, they are considered unemployed. If someone does not have a job and isn’t looking for one, they are considered outside of the labor force.
The rate is then calculated as the number of people who are actively looking for jobs (i.e. the “unemployed”) divided by the number of people who have jobs plus those actively looking (i.e. the “labor force”). Anyone who is not looking is not considered part of the calculation.
For example, let’s say the BLS conducts a survey of 60,000 households that yields 110,000 respondents. In their survey, they find the following results:
- Of those respondents, 60,000 have jobs. They either work for an employer or have their own business.
- Another 10,000 say they are looking for work.
- The remaining 40,000 are not considered part of the labor force. They may be going back to school, disabled and unable to work, or perhaps have given up looking for work because the economy is so bad. What’s most surprising is that the existence of this last group is completely ignored by the unemployment rate.
According to this result, the unemployment rate would be 14.3%. This is figured by calculating (10,000/(10,000+60,000)) = 14.3%. The 40,000 people who aren’t classified in the labor force are not involved in the calculation, even though this number likely includes those who need work and would gladly take a job if offered one.
Flaws with Unemployment Calculations
There are multiple reasons why unemployment calculations are not completely accurate:
- The number of people left out of the work force is staggering. Millions of people have recently left the work force. The number of unemployed Americans would be more than a third higher if these people were included, which would in turn significantly increase the unemployment rate. Statistics also don’t reflect the number of recent grads who have declared themselves not looking for work.
- The household survey uses a limited sample size. Although 60,000 households may seem like a lot, it is hardly representative of the 115 million or so that exist in the United States. It is difficult to know how well these 60,000 households represent the country as a whole. Many factors go into the determination of who is unemployed, such as education, ethnicity, and geography (which can vary state to state, city to city, or even street to street). If a particular group was overrepresented or underrepresented, the figure can be strongly biased.
- Many people are included as employed when they don’t earn a livable income. Just because someone is classified as employed doesn’t mean they can survive off their income. They are the “under-employed” and are not represented in the federal unemployment rate. I have a friend whose employer only gives her work four days every two weeks, so she still has to live with her parents. Although she is technically employed, she cannot make ends meet with her part-time job. Furthermore, some are considered self-employed, but their business doesn’t earn substantial income. Many other jobs, such as farm workers or tourist companies, offer seasonal employment, so someone classified as employed may only work for a couple of months.
- The business survey double counts people who have multiple jobs. If you work on a fryline at KFC, do auto body work, and help out with a landscaping company, you will add three jobs to the survey. In other words, your part-time job may end up “counting” for someone who is actually unemployed. This makes it difficult to know how many people really have jobs, especially in times when many must find a second job just to get by.
- Overlap can cause confusion. Some people fall into a couple of unemployment situations. For example, students are normally left out of the work force. However, if a high school student starts looking for a job, they become part of the work force and are classified as unemployed until they find one. People are also counted as employed if they just lost their job, but worked during the week of reference the statistician was using.
- People are classified as employed as long as they “technically” still have a job. Often, someone is placed on temporary leave due to a variety of issues, but it’s clear they are at risk of losing their job permanently. Others have to leave for medical reasons, but may not be able to return to work. These people may know they won’t go back to work again, but until their employment status is sorted out, they are classified as employed.
What Is the Real Unemployment Rate?
Unemployment is difficult to calculate accurately for a number of reasons. The biggest problem is that the true unemployment rate is subjective. Here are some questions you might ask yourself when deciding what the real unemployment rate is:
- Should we count someone as unemployed if they want a job but aren’t looking for one?
- Should someone who doesn’t feel like working be classified as unemployed instead of being out of the labor force?
- Should disabled citizens who can’t work be classified as unemployed?
- Should self-employed people be classified as unemployed if they have no income?
- Should high school students be included in the calculation?
In addition to the BLS, other organizations measure unemployment and can produce rates up to two times as much or higher than the rate determined by the government.
Considering the factors above, it’s easy to see how unemployment rates can be misleading. If you need to get a sense of how many people have jobs, be skeptical of figures provided by the federal and state governments. In fact, as unemployment benefits expire, the numbers may actually appear to improve in some states.
Unemployment is certainly an important factor to consider when assessing the overall health of the economy, but may be best measured by your own personal experience. If you are one of the many unemployed who aren’t finding work, look less to the overall state of the economy and more toward ways that you might be able to make the best use of your unemployment.