A Refresher on How the Unemployment Rate is Calculated

People understandably are often confused about how the unemployment rate can indicate one thing while the jobs created number suggests otherwise. Simply put, they come from different surveys.

Why Did the Unemployment Rate Drop? has the explanation for the Augusta results reported earlier today:

"The U.S. unemployment rate dropped to 8.1% in August and a broader measure dropped even more to 14.7%, even as the economy added a meager 96,000 jobs. Why the drop?

The decline in the unemployment rate wasn’t because more people had jobs. In fact, the number of people employed as measured by the household survey declined by 119,000. The fall came from fewer people looking for work in August and dropping out of the labor force.

The number of jobs added to the economy and the unemployment rate come from separate reports. 

The number of jobs added — the 96,000 figure — comes from a survey of business, while the unemployment rate comes from a survey of U.S. households. The two reports often move in tandem, but can move in opposite directions from month to month. In August, the household survey might have recorded a drop in the jobless rate, but below the headline number were more worrying signs.

The unemployment rate is calculated based on the number of unemployed — people who are without jobs, who are available to work and who have actively sought work in the prior four weeks. The “actively looking for work” definition is fairly broad, including people who contacted an employer, employment agency, job center or friends; sent out resumes or filled out applications; or answered or placed ads, among other things. That number declined by 250,000 in August, but it was overwhelmed by a 368,000 drop in the size of the labor force. That suggests that many of those 250,000 stopped looking for work not because they found a job, but because they dropped out of the labor force. The unemployment rate is calculated by dividing the number of unemployed by the total number of people in the labor force.

The drop in the labor force lowered what is known as the participation rate, which is the percent of the population who are working or looking for work. That rate at 63.5% is at the lowest levels since women first started entering the labor force in large numbers. Part of the decline is no doubt due to retiring Baby Boomers, but part is also discouraged workers giving up looking for a job.

Meanwhile, the broader unemployment rate, known as the “U-6″ for its data classification by the Labor Department, was dropped to 14.7% from 15% a month earlier. The U-6 figure includes everyone in the official rate plus “marginally attached workers” — those who are neither working nor looking for work, but say they want a job and have looked for work recently; and people who are employed part-time for economic reasons, meaning they want full-time work but took a part-time schedule instead because that’s all they could find.

In August, the drop in the U-6 rate was driven by the same factors that caused the drop in the unemployment rate, but it fell even more because of a big drop in the number of part-time workers who would like full-time jobs."

Summing Up

I hope the above explanation of how the numbers work helps clarify matters for those of you who may not be all that familiar with these things.

It's always important to remember that (1) how many people are working, (2) how many hours they're working, (3) how productive they are during those hours worked and (4) how much they're paid to do that work as a combined TOTAL tells the labor story.

That labor story in turn helps to tell the country's GDP or total output story.

Which then brings us back to the labor story.

Got it?

Thanks. Bob.