The unemployment rate is one of the most closely followed indicators used by businesses, investors, and private citizens to gauge the health of the U.S. economy. Investor sentiment and consumer confidence have strong inverse relationships with the percentage of unemployed Americans. When the unemployment rate rises, investors guard their money more closely, and consumers become reticent, fearing economic calamity. When the rate is low, people are more confident about the economy, and it shows in their investing and spending patterns.
Bureau of Labor Statistics Survey
Despite what many people believe, the unemployment rate is not measured by calculating the number of people collecting unemployment insurance. In fact, the government comes up with this much-anticipated number each month by following a process that more closely resembles the U.S. Census. The unemployment rate is measured by a division of the Department of Labor known as the Bureau of Labor Statistics or BLS. This government agency conducts a monthly survey called the Current Population Survey that involves 60,000 households. These households are selected using random sampling methods designed to generate as close an approximation as possible to the larger population.
The number of households in the sample may seem small, especially when compared to the greater than over 329 million citizens who live in the U.S. Still, it is actually quite large compared to most public opinion surveys, which usually feature 2,000 or so participants, sometimes even fewer. Each month, U.S. Census employees contact the households in the sample and ask specific questions to determine employment status.
The first piece of information they want to determine is how many people in the household are actually in the labor force, meaning these people have jobs or are actively looking for jobs. Only citizens who are in the labor force are counted in the unemployment rate. Someone who does not have a job but claims he is not looking for one is considered out of the labor force and is not counted in the unemployment rate.
For example, suppose that during a given month, the BLS gathers information on a total of 100,000 people from the 60,000 survey households. A total of 25,000 of those people claim they do not have a job and are not actively looking for one. These people are classified as not in the labor force. They are not counted toward the unemployment rate. The remaining 75,000 people claim to be active members of the labor force, either because they have a job or they are actively looking for one. Of those respondents, 70,000 are gainfully employed, while the other 5,000 are unemployed but looking for work. Therefore, 93.3% of respondents in the labor force are employed; the remaining 6.7% are considered unemployed. The official unemployment rate for that month is 6.7%.
Though there are an additional 25,000 unemployed people in the survey, because they are considered out of the labor force, they do not count as jobless as far as the official unemployment rate is concerned. This is a controversial issue, as many feel the unemployment rate excludes a large number of people who are out of the labor force, not because they do not want a job, but because they have simply given up looking. Therefore, some people argue the unemployment rate paints a brighter picture than reality.