Learning Objectives

• Calculate the labor force percentage and the unemployment rate
• Explain hidden unemployment and what it means to be in or out of the labor force
• Evaluate the collection and interpretation of unemployment data

Who’s In or Out of the Labor Force?

Should all jobless people, including children, retirees, and college students, be counted as unemployed? Some social situations lend themselves to unintentional unemployment, such as child rearing, poor health, or parental leave, and should not be counted in this group.

The point is that the adult population is not just divided into employed and unemployed. A third group exists: People who do not have a job, and for some reason—retirement, looking after children, taking a voluntary break before a new job—are not interested in having a job, either. It also includes those who do want a job but have quit looking, often due to being discouraged by their inability to find suitable employment. Economists refer to this third group as out of the labor force or not in the labor force.

The U.S. unemployment rate, which is based on a monthly survey carried out by the U.S. Bureau of the Census (BOC), asks a series of questions to divide up the adult population into employed, unemployed, or not in the labor force. To be classified as unemployed, a person must be without a job, currently available to work, and actively looking for work in the previous four weeks. Thus, a person who does not have a job but who is not currently available to work or has not actively looked for work in the last four weeks is counted as out of the labor force.

• Employed: currently working for pay
• Unemployed: Out of work and actively looking for a job
• Out of the labor force: Out of paid work and not actively looking for a job
• Labor force: the number of employed plus the unemployed

Calculating the Unemployment Rate

Figure 7.2 shows the three-way division of the over-16 adult population. In February 2015, about 62.8 percent 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 Table 7.1. 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.

Figure 7.2 Employed, Unemployed, and Out of the Labor Force Distribution of Adult Population (age 16 and older), February 2015 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.

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 percent rate of unemployment. The following Work It Out feature will walk you through the steps of this calculation.

Hidden Unemployment

Even with the out of the labor force category, there are still some people who 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 are no longer counted among the unemployed, also fall into this group.

Labor Force Participation Rate

Another important statistic is the labor force participation rate. This is the percentage of adults in an economy who are either employed or who are unemployed and looking for a job. So, Using the data in Figure 7.2 and Table 7.1, those included in this calculation would be the 157 million individuals in the labor force. The rate is calculated by taking the number of people in the labor force—the number employed and unemployed—divided by the total adult population, and multiplying by 100 to get the percentage. Data from February 2015 shows that the labor force participation rate is 62.8 percent. Historically, the civilian labor force participation rate in the United States climbed beginning in the 1960s as women increasingly entered the workforce, and peaked at around 68 percent in late 1999 to early 2000. Since then, the labor force participation rate has steadily declined.

The Establishment Payroll Survey

When the unemployment report comes out each month, the Bureau of Labor Statistics (BLS) also reports on the number of jobs created, which comes from the establishment payroll survey. The payroll survey is based on a survey of about 140,000 businesses and government agencies throughout the United States. It generates payroll employment estimates by the following criteria: all employees, average weekly hours worked, and average hourly, weekly, and overtime earnings. One of the criticisms of this survey is that it does not count the self-employed. It also does not make a distinction between new, minimum wage, part time or temporary jobs and full time jobs with decent pay.

How is the U.S. Unemployment Data Collected?

The monthly unemployment rate announced by the BLS is based on the Current Population Survey (CPS), which has been recorded every month since 1940. Great care is taken to make this survey representative of the country as a whole. The country is first divided into 3,137 areas. The BOC then selects 729 of these areas to survey. The 729 areas are then divided into districts of about 300 households each, and each district is divided into clusters of about four dwelling units. Every month, BOC employees call about 15,000 of the four-household clusters, for a total of 60,000 households. Households are interviewed for four consecutive months, then rotated out of the survey for eight months, and then interviewed again for the same four months the following year, before leaving the sample permanently.

Based on this survey, unemployment rates are calculated by state, industry, urban and rural areas, gender, age, race or ethnicity, and level of education. A wide variety of other information is also available. For example, how long have people been unemployed? Did they become unemployed because they quit, were laid off, or their employer went out of business? Is the unemployed person the only wage earner in the family? The CPS is a treasure trove of information about employment and unemployment. Learn the difference between the CPS and Establishment Payroll Survey (EPS), in the following Clear It Up feature.

Criticisms of Measuring Unemployment

There are always complications in measuring the number of unemployed. For example, what about people without jobs who are available to work, but are discouraged by the lack of available jobs in their area and stopped looking? Such people and their families, may be suffering the pains of unemployment. But the survey counts them as out of the labor force because they are not actively looking for work. Other people may tell the BOC that they are ready to work and looking for a job, but are not that eager to work and are not looking very hard at all. They are counted as unemployed, although they might more accurately be classified as out of the labor force. Still, others may have a job, like yard work, child care, or housecleaning, but are not reporting the income earned to the tax authorities. They may report being unemployed, when they are actually working.

Although the unemployment rate gets most of the public and media attention, economic researchers at the BLS publish a wide array of surveys and reports that measure these kinds of issues, and develop a more nuanced and complete view of the labor market. It is not exactly a hot news flash that economic statistics are imperfect. However, even imperfect measures like the unemployment rate can still be quite informative, when interpreted knowledgeably and sensibly.

Link It Up

Click here to learn more about the CPS to read frequently asked questions about employment and labor.