How BLS calculates the Unemployment Rate

USING BLS DATA POSTED JANUARY 7, 2011

United States population: 312 million.

To quantify the extent of the problem of unemployment, we start with the civilian, non-institutionalized, off-the-farm population (16 and older) of 238.9 million. Then, surveying by phone, we ask a series of questions to arrive at the unemployment rate.

1. Are you currently employed?

A. Yes.

B. Yes, but only part time.

A + B = Employed = 139.2 million.

No = 238.9 – 139.2No = 238.9 – 139.2 = 99.7 million.

Are all these people actually unemployed?

1. Are you currently employed?

A. Yes.

B. Yes, but only part time.

C. No.

2. If “No,” are you actively looking?

A. Yes.

Yes = Unemployed = 14.5 million.

2. If “No,” are you actively looking?

A. Yes.

B. No.

No = 99.7 – 14.5 = 85.2 million.

These people are not in the labor force.

No = not working; not looking

Looking

Working + Looking

The Unemployment Rate = Unemployed

Employed + Unemployed

Unemployed

Labor ForceUnemployed

Labor Force

The Unemployment Rate = Unemployed

Employed + Unemployed

Unemployed

Labor Force

Unemployment Rate = 14.5/ (139.2 + 14.5)

Unemployment Rate = 14.5 / 153.7

Unemployment Rate = 0.094 = 9.4 percent

To those not employed and not looking:

3. Why aren’t you looking for a job?

A. I don’t want a job.

B. I’m discouraged—I can’t find one.

“Discouraged Workers” = 1.3 million.

The Unemployment Rate (Discouraged Worker included)

Unemployed plus Discouraged Worker

Labor Force plus Discouraged Worker

= (14.5 + 1.3) / (153.7 + 1.3)

The U+DW Rate = 0.102 = 10.2 percent

What is the current Unemployment Rate?

9.4%This is the unemployment rate for December of 2010, as reported by the BLS on Friday, January 7, 2011.

For later reports, see the UPDATE at the end of this show and/or check the BLS website.

Click here for an update.

LFPR = 153.7 million / 238.9 million

LFPR = 0.643 = 64.3 percent

Labor Force

Population (16 and older)

The Labor Force Participation Rate

CATEGORIES OF UNEMPLOYMENT:

frictional (still looking)

Not in the Labor Force

plus structural (a mismatch)

CATEGORIES OF UNEMPLOYMENT:

frictional (still looking)

If this typewriter repairman loseshis job, he’ll bestructurally unemployed!

Macroeconomists refer to this 5%–6% band as the natural rate of unemployment. That is, it is perfectly natural in a market economy for the workforce to experience unemployment in this range.

Note that the natural rate of unemployment, like the normal levels of inventory in other markets, is consistent with labor-market equilibrium.

N

Supply

Demand

Market for LaborN

Supply

Demand

W

Skilled Labor

Structural Unemployment

W

N

Supply

Demand

W

N

Supply

Demand

W

N

Supply

Demand

W

N

Supply

Demand

W

N

Supply

Demand

W

Unskilled Labor

Industrial Labor Agricultural Labor

Western-States Labor Plains-States Labor

In a healthy economy, frictionally unemployed workers and structurally unemployed workers make up five-to-six percent of the workforce.

NOTE: The economy’s workforce (or labor force) includes employed workers and unemployed workers and constitutes about half of the US population.

NOTE: The unemployment rate is the ratio of the unemployed workers to the labor force. In the U.S., the ratio is 5%–6% when the economy is in good macroeconomic health.

NOTE: The ratio of the labor force to the adult population (16 years old and older and not institutionalized) is called the labor-force participation rate. In the U.S., this ratio is about 65%.

NN

Supply

Demand

Market for Labor

W

Adult population (16 years old and older) minus military personnel minus the institutionalized citizenry

Employed workers

Frictionally and structurally unemployed workers

Not in the labor force

W

Employment and Unemployment In a Healthy Market Economy

NOTE:

Cyclical unemployment occurs when there is an overall reduction in the demand for labor (a reduction not warranted by some change in preferences or in overall resource availabilities).

NOTE: Frictional and structural unemployment make no explicit showing in the analytical reckoning.

NOTE: The amount of cyclical unemployment (currently 3.4% or 3.9%) makes an exaggerated appearance in the analytical reckoning.

NOTE: The unemployment rate reported by the BLS includes frictional, structural, and cyclical unemployment.

Adult population (16 years old and older)

N

Supply

Demand

Adult population (16 years old and older) minus military personnel minus the institutionalized

Employed workers

Frictionally and structurally unemployed workers

Not in the labor force

W

Cyclical Unemployment In a Depressed Market Economy

Employed workers

Cyclically unemployed workers

NOTE:

CATEGORIES OF UNEMPLOYMENT:

frictional (still looking)

plus structural (a mismatch)

= THE NATURAL RATE = 5%-6%

THE RESIDUAL CATEGORY:

Measured Rate of Unemployment

minus the Natural Rate

= CYCLICAL UNEMPLOYMENT

The level of unemployment consistent with sustainable prosperity--i.e., the natural rate of unemployment--has long been believed to be in the range of

A. 2 to 3 percent.

B. 3 to 4 percent.

C. 4 to 5 percent.

D. 5 to 6 percent.

Ferris Beuller graduated from college during the Bush recession. He spent 1990 looking in vain for reasonable employment. Totally discouraged, he spent 1991 playing Minesweeper on his girlfriend’s computer. The Bureau of Labor Statistics would classify Mr. Beuller (in 1991) as

A. self-employed.

B. institutionally unemployed.

C. a discouraged worker.

D. structurally unemployed.

6%

5%

REPRESSED OR

DEPRESSED ECONOMY

OVERHEATED ECONOMY

5.5%

NBER’s Call: End of Expansion

NBER’s Call: End of Recession Beginning of Recovery (June 2009)

T H E N A T U R A L R A T E O F U N E M P L O Y M E N T

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What is the source of the dramatic gyrations around full employment?

Are they inherent in the nature of market economies?

Or are they perverse consequences of ill-conceived or politically motivated macroeconomic policy?

T H E N A T U R A L R A T E O F U N E M P L O Y M E N T

UPDATE

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THE EMPLOYMENT SITUATION JANUARY 2011

The unemployment rate fell by 0.4 percentage point to 9.0 percent in January, while nonfarm payroll employment changed little (+36,000), the U.S. Bureau of Labor Statistics reported today.

Employment rose in manufacturing and in retail trade but was down in construction and in transportation and warehousing. Employment in most other major industries changed little over the month.

THE EMPLOYMENT SITUATION JANUARY 2011

The unemployment rate (9.0 percent) declined by 0.4 percentage point for the second month in a row.

The number of unemployed persons decreased by about 600,000 in January to 13.9 million, while the labor force was unchanged.

(Based on data adjusted for updated population controls.)