Understanding the Unemployment Picture: Defining and Measuring Unemployment

November 20, 2011

Waller demonstrates how economists use simple formulas to calculate how many millions are employed, unemployed and in the labor force. The number of Americans participating in the labor force (e.g., employed or unemployed/actively seeking work) is declining, fueled in part by those who have given up entirely on finding employment.


Christopher Waller: Two-thirds of you thought it's number two, which is the reports of the number of people collecting unemployment benefits each month, that that's how you measure unemployment. It turns out that's not right. (Laughter) Okay? I love it when you play along. Otherwise, the slides I've got are kind of boring. You already know the answer. The unemployment rate is actually calculated by surveying 60,000 U.S. households and asking them questions. And then within those questions, they put you in three possible categories. They'll say, "Did you work in the last four weeks?" Whether it was a paid employee, worked in your own business, or like your children, you make them work at the counter and you don't pay them anything, except food and a bed at night. Okay?

So if you answer "yes" to that kind of a survey question, you get counted as being a job. Notice what it doesn't say. What? How many hours. It just says, "Did you work?" Okay? Could be one hour. Could be five hours. Could be 70 hours. They just ask you if you worked or not for pay. Unemployed? Okay, those who were not employed and were available for work and tried to find a job in the previous four weeks, you're considered to be unemployed. Notice what's not in that definition that you thought was in that definition. No mention of unemployment benefits. It's irrelevant for measuring unemployment. Okay? In this survey. So they just ask you, "Did you have a job?" You say "no." "Were you looking for a job?" You say "yes," you’re unemployed. That's it. Okay?

Now if you say, "I didn’t have a job," or, "I wasn’t looking for a job," you get put in this category called "not in the labor force." Okay? So this would be somebody who's a fulltime student, somebody who stays at home, or somebody who's retired. Okay? Yep, that's it. Well, I suppose you could also—I don't know. I have to think. If you're in prison, yeah, you probably—first, you're not getting surveyed. Usually, that's the first thing. Okay? All right. So those are the three categories. You get to be in one of those three—everybody gets to be put in a box that gets this survey.

So what do we define the labor force? The labor force is all the people who are employed and they have a job, or they are unemployed and looking for a job. That's called the labor force. We just sum those two together. The unemployment rate is just a very simple number. We take the number of people who were classified as in that unemployed category and we divide them by the size of the labor force and just multiply by 100. So that's just how you calculate the unemployment rate. Okay, now first of all, you've got to be over the age of 16 as well. You've got to be legal to work and all those kind of usual things.

Now the other thing we look at is the labor force participation rate. We say, "Let's take all of the adults," those over the age of 16, for labor market purposes—the entire population over 16, and we say, "What fraction of the population is either employed or unemployed?" Okay? We call that the labor force participation rate. And what we can see is that about—at the peak of the late '90s, it was about 67 percent of the adult population was in the labor force, working or unemployed.

We can see a big steady increase in that labor force participation, and then we've seen a downward trend over the last decade, which, again, is a bit puzzling. We understand some of this. This is the baby boom coming into the labor force. This is women reentering the labor force en masse. But it's a kind of a puzzle why it suddenly tailed off in the last 10 years. But we've seen a really big drop-off since the beginning of this recession, from 66 percent down to about 64. That's 2 percent of the adult population, so that's a big number in the U.S.

Now another thing we look at is the employment to population ratio. So all that is, is we take all those people who say they were employed, and we divide that by the adult population. And we can see that employment, again, was a big drop during the severe recession of '81-'82, and then a long, steady decline. It always drops in recessions. But, again, this fraction has been steadily going down over the last ten years. So, again, there's some exodus out of the whole idea of working in the U.S. Some of that's aging. Some of it's other things.

This popular lecture series addresses key issues and provides the opportunity to ask questions of Fed experts. Views expressed are not necessarily those of the St. Louis Fed or Federal Reserve System.

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