The Historical Trend

Unemployment Rate

While the unemployment rate reaches relatively low levels during expansions, it never falls to 0 percent. In principle, full employment is thought of as occurring when ALL resources (especially labor) are engaged in production, in practice, full employment generally corresponds to an unemployment rate of about 5 percent. This 5 percent unemployment rate, often termed the natural unemployment rate, includes both frictional and structural unemployment.

Collecting the Data

The BLS separates respondents into one of three categories:

• Employed: This category includes everyone 16 years or older who: (1) had paid jobs, (2) worked for 15 hours or more as unpaid workers in family businesses, or (3) were temporarily absent from paid jobs due to illness, vacation, labor dispute, and similar events.


• Unemployed: The unemployed category includes everyone 16 years or older who: (1) were actively seeking employment and available for work or (2) were not actively seeking employment because they were temporarily laid off from jobs and waiting to be a recalled.


• Not In Labor Force: Because the labor force is comprised of anyone in the employed or unemployed categories, this third category includes everyone else. Two notable groups included are marginal workers and discouraged workers.

A Simple Formula

unemployment rate

=

number unemployed civilian labor force

x 100

Crunching the Numbers

unemployment rate

=

5,000,000 100,000,000

x 100

=

5 percent

A more recent realistic calculation can be done for December 2003 numbers. The labor force during that month was 146,878,000 with 138,480,000 in the employed category and 8,398,000 having the unemployed designation. This gives an unemployment rate of 5.7 percent, as illustrated here:

unemployment rate

=

8,398,000 146,878,000

x 100

=

5.7 percent

Measurement Problems

A couple of measurement problems exist that could cause the official unemployment rate to be understated or overstated.

• Understated: Anyone with a paying job is officially counted as being employed. Unfortunately, this includes those working part-time, who want to work full-time. In theory, a person working 20 hours a week, who is willing and able to work 40 hours a week should be considered as "half employed." The official unemployment rate calculation only considers such workers as employed.

  Moreover, to be officially counted as unemployed a person must be actively seeking a job. Unfortunately, this excludes discouraged workers who have stopped looking for employment. They are willing and able to work, and in principle should be considered as unemployed, but they have simply stopped looking. The official unemployment rate calculation does not consider these workers as unemployed nor part of the labor force.

  Including both part-time workers and discouraged workers would tend to increase the unemployment rate.

• Overstated: The Current Population Survey relies on respondents answering questions truthfully. Some respondents, however, might be inclined to deceive the survey takers. A prime example are those working in illegal industries, such as gambling, prostitution, or controlled drugs. They obviously do not want this information reported to a FEDERAL GOVERNMENT agency. Other respondents might be working at legal jobs (perhaps under one name), but also collecting welfare, Social Security, or unemployment compensation (under another name). These folks also have little inclination to reveal this information to the FEDERAL GOVERNMENT.

  The official unemployment rate calculation is likely to count these illegally employed workers as unemployed. Were these people accurately categorized, then the unemployment rate would be less.