Monday  September 16, 2024
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 HOMOGENEOUS OF DEGREE N: A property of an equation the exists if independent variables are increased by a constant value, then the dependent variable is increased by the value raised to the power of n. The value of n can be greater than, less than, or equal to one. This property often surfaces in the analysis of production functions. If n = 1, then a doubling independent variables results in a doubling of the dependent variable and the production function has constant returns to scale. If n > 1, then a doubling independent variables results in more than a doubling of the dependent variable and the production function has increasing returns to scale. If n < 1, then a doubling independent variables results in less than a doubling of the dependent variable and the production function has decreasing returns to scale.

UNEMPLOYMENT RATE:

The proportion of the civilian labor force 16 years or older that is actively seeking employment, but is unemployed and not engaged in the production of goods and services. The unemployment rate is estimated and reported monthly by the Bureau of Labor Statistics of the U.S. Department of Labor. It is used not only as the prime measure of labor unemployment in the economy, but also as a key indicator of business-cycle instability. In principle, the unemployment rate measures the proportion of the labor that is willing and able to work, but not employed. In practice, the official unemployment rate is simply the ratio of total unemployment to the total civilian labor force, in percentage terms.
The unemployment rate, the percent of the labor force that is unemployed, is a primary measure of macroeconomic activity. If the economy is in an economic downturn, or a business-cycle contraction, then the unemployment rate increases. After a business-cycle expansion begins, then the unemployment rate declines.

### The Historical Trend

Unemployment Rate
As indicated in the exhibit to the right, the unemployment rate varies over time, especially over the course of business-cycle activity, rising during contractions and falling during expansions. The range is usually between 4 percent and 6 percent, but it has been as low as 2 percent and as high as 25 percent. During the contraction of the early 1990s, the unemployment rate rose from 5 percent to nearly 7 percent. In the ensuring expansion that occupied the better part of the 1990s, the unemployment rate fell from the 7 percent level to just over 4 percent. During the contraction of the early 2000s, it rose from 4 percent to over 6 percent.

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 key to accurately estimating the unemployment is accurately determining the total unemployment and the total civilian labor force. This task falls upon the fine folks at the Bureau of Labor Statistics (BLS), using a monthly survey of 60,000 occupied households called the Current Population Survey (CPS). The CPS uses a series of questions to determine the employment, unemployment, and labor force status of each respondent. These sample numbers are then extrapolated, using standard and time-tested statistical techniques, to estimate employment, unemployment, and labor force totals for the national economy.

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

Once the estimates of unemployment and labor force are derived from the monthly CPS, the actual unemployment rate calculation is relatively straightforward. As illustrated in the following equation, the unemployment rate is simply the number unemployed, divided by the civilian labor force, which is then multiplied by 100 to put the result into an easily recognizable percent form.

 unemployment rate = number unemployedcivilian labor force x 100

### Crunching the Numbers

Consider a calculation or two to demonstrate. If there are 100 million people in the labor force, consisting of 95 million people employed and 5 million unemployed, then the unemployment rate is 5,000,000 (the number unemployed) divided by 100,000,000 (the labor force). In percentage terms this is 5 percent. While the collection of unemployment data can be quite involved, the actual calculation is not.

 unemployment rate = 5,000,000100,000,000 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 = 8,398,000146,878,000 x 100 = 5.7 percent

### Measurement Problems

The fine folks at the BLS do an exceptional job of determining the employment, unemployment, and labor force status of almost 300 million people each month. However, like any measure of economic activity in a complex, dynamic economy such as that in the United States, the "official" unemployment rate is not flawless.

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.

The official unemployment rate regularly reported in the news media does suffer from measurement problems and should be used with some caution. However, the BLS actually tracks six separate unemployment measures, labeled U1 to U6, that address some of these problems and give a better picture of unemployment. The official unemployment rate is actually U3. The other five measures seek to document different ways in which labor can be underutilized. U1, for example, measures the "extended" unemployment rate, that is, workers who have been unemployed for 15 weeks or more. Alternatively, U4 incorporates discouraged workers into the calculation of the unemployment rate.

 <= UNEMPLOYMENT, PRODUCTION POSSIBILITIES UNEMPLOYMENT RATE, MEASUREMENT PROBLEMS =>

Recommended Citation:

UNEMPLOYMENT RATE, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2024. [Accessed: September 16, 2024].

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