6.4: Unemployment Rate

The BLS uses data from the CPS to compute the percentage of the labor force that is considered unemployed. This indicator is commonly referred to as the unemployment rate (u-rate).

\[\text { Unemployment rate }=\frac{\text { Unemployed }}{\text { Labor force }} \nonumber \]

\[\text { 2009 U.S. Unemployment rate }=\frac{14.27 \mathrm{~m}}{139.9 \mathrm{~m}}=10.2 \% \nonumber \]

Changes in the u-rate depend on the relative magnitudes of the growth in jobs and the growth in the labor force. See figure 5.

Figure 5: U.S. Unemployment Rate 1962-2009

Source: Bureau of Labor Statistics

Figure 5 shows changes in the u-rate and periods of recession in the U.S. between 1962 and 2009. And over the last 7 business cycles the u-rate has typically acted as a leading/coincident indicator going into recessions and a lagging indicator during recoveries.

How accurate is the u-rate? There are several factors that can cause the u-rate to overestimate or underestimate the actual rate of unemployment in the country:

• Underemployed Worker (underestimation)
  These are part-time workers, who are counted as employed, but they really want full-time work. Because of the difficulty of using a survey to identify subjective data, no official government statistics are available on the total number of people who might be viewed as underemployed. Even if many or most could be identified, it would still be difficult to quantify the loss to the economy of such underemployment.

• Phantom Worker (overestimation)
  Unemployed people who really do not want to work but act as if they do so they can claim unemployment insurance benefits.

• Unrealistic Worker (overestimation)
  Unemployed people are not willing to accept work unless it pays an unrealistically high wage.

• Underground Worker
  Underground workers are individuals who are considered unemployed but are actually working in the underground economy. This situation can cause an overestimation of the u-rate.

• Discouraged Worker
  Discouraged workers are another source of distortion. They can cause an underestimation of the u-rate (i.e., causing it to fall) when more and more workers are losing their jobs (a worker dropping out of the labor force reduces the denominator of the u-rate equation, lowering the overall u-rate) and can cause an overestimation when more and more workers are finding jobs (workers reentering the labor force increase the denominator and thusly increases the overall u-rate).

Accurately accounting for discouraged workers is one of, if not the, biggest sources of inaccuracy in the u-rate figures. How can the BLS distinguish between a person who is legitimately discouraged from the search for non-existent jobs from the person who claims to be discouraged but is not putting forth a legitimate effort to find work?

Because of these problems, the Census Bureau has made changes to the CPS to more accurately count discouraged workers. Specifically, the 1994 redesign of the CPS made definitional changes concerning discouraged workers. As a result of the redesign, two requirements were added: For persons to qualify as discouraged, they must have engaged in some job search within the past year (or since they last worked if they worked within the past year), and they must be currently available to take a job (formerly, availability was inferred from responses to other questions; now there is a direct question). Also, beginning in January 1994, questions on this subject are asked of the full CPS sample, permitting estimates of the number of discouraged workers to be published monthly (rather than quarterly).

As a result of this survey redesign, the estimate of discouraged workers has been significantly lowered.

To see a table of the categories and numbers of people not counted as part of the labor force, go to: http://www.bls.gov/cps/cpsaat35.pdf