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21.1 How the unemployment rate is defined and computed  (Page 2/23)

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Labor force : the number of employed plus the unemployed

Calculating the unemployment rate

[link] shows the three-way division of the over-16 adult population. In February 2015, about 62.8% of the adult population was "in the labor force"; that is, people are either employed or without a job but looking for work. Those in the labor force can be divided into the employed and the unemployed. These values are also shown in [link] . The unemployment rate    is not the percentage of the total adult population without jobs, but rather the percentage of adults who are in the labor force but who do not have jobs:

Unemployment rate = Unemployed people Total labor force  ×  100

Employed, unemployed, and out of the labor force distribution of adult population (age 16 and older), february 2015

The pie chart shows that, in 2015, 92,898 thousand people were out of the labor force, 148,297 thousand people were employed, and 8,705 thousand people were unemployed
The total adult, working-age population in February 2015 was 249.9 million. Out of this total population, 148.3 were classified as employed, and 8.7 million were classified as unemployed. The remaining 92.9 were classified as out of the labor force. As you will learn, however, this seemingly simple chart does not tell the whole story.
(Source: http://www.bls.gov/news.release/empsit.t01.htm)
U.s. employment and unemployment, february 2015
Total adult population over the age of 16 249.9 million
In the labor force 157 million (62.8%)
Employed 148.3 million
Unemployed 8.7 million
Out of the labor force 92.9 million (37.2%)

In this example, the unemployment rate can be calculated as 8.7 million unemployed people divided by 157 million people in the labor force, which works out to a 5.5% rate of unemployment. The following Work It Out feature will walk you through the steps of this calculation.

Calculating labor force percentages

So how do economists arrive at the percentages in and out of the labor force and the unemployment rate? We will use the values in [link] to illustrate the steps.

To determine the percentage in the labor force:

Step 1. Divide the number of people in the labor force (157 million) by the total adult (working-age) population (249.9 million).

Step 2. Multiply by 100 to obtain the percentage.

Percentage in the labor force = 157 249.9 = 0.6282 = 62.8%

To determine the percentage out of the labor force:

Step 1. Divide the number of people out the labor force (92.9 million) by the total adult (working-age) population (249.9 million).

Step 2. Multiply by 100 to obtain the percentage.

Percentage in the labor force = 92.9 249.9 = 0.3717 = 37.2%

To determine the unemployment rate:

Step 1. Divide the number of unemployed people (8.7 million) by the total labor force (157 million).

Step 2. Multiply by 100 to obtain the rate.

Unemployment rate = 8.7 157 = 0 . 0554 = 5.5%

Hidden unemployment

Even with the “out of the labor force” category, there are still some people that are mislabeled in the categorization of employed, unemployed, or out of the labor force. There are some people who have only part time or temporary jobs and who are looking for full time and permanent employment that are counted as employed, though they are not employed in the way they would like or need to be. Additionally, there are individuals who are underemployed    . This includes those that are trained or skilled for one type or level of work who are working in a lower paying job or one that does not utilize their skills. For example, an individual with a college degree in finance who is working as a sales clerk would be considered underemployed. They are, however, also counted in the employed group. All of these individuals fall under the umbrella of the term “ hidden unemployment .” Discouraged workers , those who have stopped looking for employment and, hence, are no longer counted in the unemployed also fall into this group

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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