Who exactly counts as “unemployed”?
For example, many college students don’t have jobs, but that
doesn’t mean they’re officially unemployed.
In fact, just because you don’t have a job doesn’t mean you’re
So how is unemployment calculated? Before we take a look at
that question, let’s examine the natural rate of
The Natural Rate of Unemployment (u*)
There are three types of unemployment:
Figure 11.4 illustrates the relationship among these types of
unemployment during both recessions, which are short-term
economic downturns that typically last about 6 to 18 months,
and healthy macroeconomic conditions.
Notice that structural and frictional unemployment are always
Natural Rate of Unemployment cont.
When we acknowledge a certain level of normal or natural
unemployment, we must also recognize a natural rate of unemployment.
The natural rate of unemployment (u*) is the typical unemployment rate
that occurs when the economy is growing normally.
Because frictional and structural unemployment are always present, zero
unemployment isn’t possible.
Economists never know the exact numerical value of the natural rate
because people don’t put themselves into an unemployment category.
Currently, however, most economists feel that the natural rate of
unemployment in the United States is between 4% and 6%.
The Unemployment Rate (u) calculation
The most commonly discussed number when examining the
employment picture in a country is the unemployment rate.
The unemployment rate (u) is defined as the percentage of
the labor force that is unemployed.
This statistic is computed by the U.S. Bureau of Labor
Statistics.*We measure this rate
Let’s look at this definition more closely.To be officially
unemployed, a person has to be in the labor force.
A member of the labor force is someone who is already employed
or actively seeking work.
If a jobless person hasn’t sought a job in four weeks, that person
isn’t counted in the unemployment statistics.
This is an important point. If you don’t have a job but you stop
looking for work, for any reason, then you aren’t officially counted
Other individuals not included in the official definition of the labor
force (the relevant population for counting the labor force) include
retirees, stay-at-home parents, people who are in jail, military
personnel, children under age 16, and many full-time students.
Different Labor Market Categories
Table 11.3 provides data for different labor market categories.
Starting with the relevant U.S. population—those people who
are civilian (not in the military), non-institutionalized (not in
jail, mental facilities, or homes for the aged),
and over the age of 16 (250,663,000)—we find that less than
two thirds of it is counted in the labor force (157,073,000).
Of this, in June 2015, fully 8,299,000 were unemployed.
Plugging these numbers into Equation 11.6 yields:
Shortcomings of the Unemployment Rate
The unemployment rate, released monthly, is a timely and
consistent indicator of the health of the macroeconomy.
However, it has three shortcomings as an economic indicator.
Let’s look at each in turn:
Discouraged and UnderemployedWorker
The Length of Unemployment
Who Is Unemployed?
Discouraged and Underemployed Worker
The first shortcoming of the unemployment rate is related to
People who are unemployed for a long time may just stop looking
for work—not because they don’t want a job, but because they get
When they stop looking for work, they fall out of the labor force
and no longer count as unemployed.
In other words, they are excluded from the statistics. Discouraged
workers are defined as those who are not working, have looked for
a job in the past 12 months and are willing to work, but have not
sought employment in the past 4 weeks.
Cont. –Part time jobs
Another group not properly accounted for are underemployed workers,
defined as workers who have part- time jobs but who would prefer to
work full- time.
These workers are not counted as unemployed. In fact, the official
unemployment rate includes only workers who have no job and who are
actively seeking work.
This definition excludes both discouraged and underemployed workers,
groups that increase during economic downturns.
Figure 11.5 shows the official U.S. unemployment rate for the period
1994–2014 versus an alternative measure that includes discouraged and
Not only does the alternative measure show a much higher rate than
the unemployment rate, but the difference expands significantly during
and after recessions (the blue- shaded regions).
The Length of Unemployment
The second shortcoming of the official measurement of
unemployment is that it doesn’t answer another important set of
questions about who is unemployed or how long they’ve been out
Are people unemployed for short spells, or is the duration of their
joblessness long- term?
If most unemployment is short-term, we might not be as
concerned with a higher unemployment rate, since it indicates
that the unemployment is a temporary situation rather than a
long- term problem for workers.
To help fill in this part of the unemployment picture, the Bureau of
Labor Statistics keeps an alternative measure of unemployment
that tracks the length of time workers have been unemployed.
Table 11.4 shows the duration of unemployment in the United
States in 2007 and 2013.
The year 2007 came at the end of a long expansionary period in the
At that time, more than two- thirds of total unemployment was
short- term (14 weeks or less), and just 17.6% of those unemployed
were out of work for longer than 27 weeks.
In contrast, consider2013, after the U.S. economy experienced a
significant recession.There we see a big increase in the percentage
of those unemployed for the very long term—27 weeks or more—
which was more than 37% of total unemployment in 2013.
Who Is Unemployed
A final issue to consider is exactly who is unemployed.
Consider the unemployment rate for two different months.
If the unemployment rate is 6.2% in April and 6.2% in May, you might think that
those people unemployed in April are still unemployed in May.
After all, the unemployment rate hasn’t changed.
But the unemployment rate is a national statistic. It tells you what percentage of
the overall labor force is actively seeking work, but it doesn’t tell you who those
It’s possible that the 6.2% unemployment in May constitutes an entirely different
group of people from the 6.2% of people who were unemployed in April.
Jobs are lost in one part of the country and gained somewhere else.Thus, it
would be a mistake to think that the same people are unemployed month after
month.While this is certainly true for the long- term unemployed, those who
make up the short-term unemployed are usually different from month to month.
Other Labor Market Indicators
Macroeconomists use several other indicators to get a more
complete picture of the labor market.
These include the labor-force participation rate and
statistics on gender and race.
The size of the labor force is an important macroeconomic statistic.
To see why, consider two hypothetical island economies called 2K and CK14.
Each island has a population of one million people, and the islands are identical in
every way except in the size of their labor forces.
On the first island, 2K, the labor force is 670,000.
On the second island, CK14, the labor force is just 627,000.
Island 2K has 43,000 more workers to produce goods and services for a
population that’s exactly the same size as that of island CK14.
The labor- force participation rate is the portion of the relevant population that is
in the labor force.
Labor- Force Participation
Labor Force Participation Rate
The labor-force participation rate is the portion of the relevant
population that is in the labor force:
On 2K, the labor- force participation rate is 67%; but on CK14,
the labor-force participation rate is just 62.7%.
By now, you may have guessed that these are the labor-force
participation rates for the U.S. economy in the years 2000 and
Figure 11.6 shows the evolution of the labor-Force
participation rate in the United States from 1990 to 2014.
You can see that it peaks at 67.3% in 2000 but then falls to
62.7% by the end of 2014.
Other things being equal, this means that in 2014 there were
fewer people working relative to the overall population in the
United States than in any of the previous years shown in the
graph, including the year 2000.
Labor Force and Demographics
The changing demographics of the U.S. population are likely to
reduce the labor-force participation rate even further over the
The term “baby boom” refers to the period after the end ofWorld
War II when U.S. birthrates temporarily rose dramatically.
The U.S. Census Bureau pegs this period at 1946–1964. So there is
now a bubble in the U.S. population known as the baby boomers.
(This group most likely includes your parents.)
But now, as the oldest baby boomers begin to retire, the labor-
force participation rate will fall.
Gender and Race Statistics
As Figure 11.7 indicates, the composition of the U.S. labor force
today is markedly different from that of two generations ago.
Not only are more women working (from 32% in 1948 to almost
60% today), but male labor- force participation has fallen
dramatically (from over 87% to under 70%).
Men still remain more likely to participate in the labor force than
women, but the participation gap has significantly narrowed.
These changes are a function of shifting social attitudes.
How do we explain the fact that fewer males are
There are several reasons for the decline.
Men are living longer, acquiring more education,
and spending more time helping to raise families.
Since men who are retired, in school, or staying
at home to care for children aren’t counted as
part of the labor force,
these shifts have lowered the labor- force
participation rate for males.
Unemployment rates also vary
widely across ages and races.
Table 11.5 breaks down these
statistics by age, race, and gender.
Looking first at unemployment
rates, in June 2015 the overall
unemployment rate was 5.3%.
Notice also that labor- force
participation rates are very low
Why do you think so?
Question: Using the data, how would you compute the
1. number of unemployed workers,
2. the unemployment rate, and
3. the labor- force participation rate for Germany in 2013?
The following data is from Germany in 2013:
Relevant population = 70,503,000
Labor force = 44,200,000
Employed = 42,276,000
1.The unemployment rate is the total number of unemployed
people as a percentage of the labor force.
First, determine the number of unemployed people by taking
the total labor force minus the number of employed:
unemployed = labor force - employed = 1,924,000
Use this to determine the unemployment rate, which is the
number of unemployed people divided by the labor force:
unemployed / labor force = 1,924,000 / 44,200,000 = 4.3%
Finally, the labor- force participation rate is the labor force as a
percentage of the relevant population:
labor- force participation rate = labor force / relevant population
= 44,200,000 / 70,503,000