A:

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 350 million people who live in the U.S., but it is actually quite large compared to most public opinion surveys; usually, these surveys 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 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%.

Survey Controversy

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 the reality.

RELATED FAQS
  1. What is the difference between structural unemployment and cyclical unemployment?

    Learn more about about the differences between structural and cyclical unemployment and when cyclical unemployment becomes ... Read Answer >>
  2. What is the difference between frictional unemployment and structural unemployment?

    Learn about structural unemployment and frictional unemployment, the differences between the two and their main characteristics. Read Answer >>
  3. What happens when inflation and unemployment are positively correlated?

    Learn about the historic relationship between inflation and unemployment and the implications that occur when they are positively ... Read Answer >>
Related Articles
  1. Financial Advisor

    How Labor Force Participation Rate Affects U.S. Unemployment

    While a falling unemployment rate sounds like a good thing, it can actually be indicative of people leaving the labor force because they can't find a job.
  2. Insights

    How The Unemployment Rate Affects Everybody

    Depending on how it's measured, the unemployment rate is open to interpretation. Learn how to find the real rate and how it affects everyone.
  3. Insights

    The Downside of Low Unemployment

    Yes, the unemployment rate can be too low.
  4. Insights

    The True Unemployment Rate: U6 Vs. U3

    Learn how to distinguish between the U-3 and U-6 unemployment rates, and explore which rate provides a truer picture of unemployment.
  5. Insights

    The Cost of Unemployment to the Economy

    Unemployment carries many costs, both obvious and hidden, for an economy.
  6. Investing

    How inflation and unemployment are related

    How can inflation affect unemployment, and vice versa? Here, we examine the relationship between wage inflation, consumer prices, and unemployment.
  7. Personal Finance

    How Unemployment Stats Affect Employed People

    Unemployment is still hovering close to 10%, but what does it all mean to you? Find out how unemployment statistics affect your employment.
  8. Personal Finance

    The Best and Worst Countries to Find a Job

    Which countries have the lowest and highest unemployment rates? The answers might surprise you.
RELATED TERMS
  1. Unemployment

    Unemployment is the term for when a person who is actively seeking ...
  2. Structural Unemployment

    Structural unemployment is a longer-lasting form of unemployment ...
  3. Natural Unemployment

    The lowest rate of unemployment that an economy can sustain over ...
  4. Civilian Labor Force

    Civilian labor force is a term used by the Bureau of Labor Statistics ...
  5. Employment Situation Report

    The Employment Situation report is a monthly report compiling ...
  6. Full Employment

    Full employment is a situation in which all available labor resources ...
Hot Definitions
  1. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  2. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  3. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  4. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  5. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
  6. Relative Strength Index - RSI

    Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
Trading Center