The Phillips curve: Inflation and unemployment
Unemployment rate primer Understanding how the headline unemployment rate (U-3) is calculated
Unemployment rate primer
- We all hear the unemployment rate quoted all the time and
- it's obviously a very important economic indicator.
- But what I want to do in this video is dig a little bit
- deeper, and actually figure out how it's calculated.
- I'm going to draw a big diagram right here.
- Let's say that that big circle represents the entire U.S.
- I just looked it up on Google.
- It's 304 million people, give or take a couple.
- And then there's going to be a subset-- that's everybody,
- that includes my 10 month old son.
- So obviously, if we're talking about unemployment, he at
- least shouldn't be relevant, not just yet.
- So there's a subset of people that the Bureau Of Labor
- Statistics considers at least kind of old
- enough to care about.
- So this is 16 years and older.
- And I'd looked that up as of November.
- That was about 237 million people in the U.S.
- But then there's a subset of that, because not everyone 16
- years and older is necessarily employable or wants to work.
- They might be in school, or in the military, or
- they might be retired.
- So they look for a subset of the people old enough to work,
- and they call that the labor force.
- I'll do the labor force in pink.
- I never use that color.
- I'll do it in green.
- So that right there in green is the labor force.
- And, as of November, if those numbers I just saw are right,
- are 154 million people.
- And then there's some subset of the labor force that the
- Bureau Of Labor Statistics considers unemployed.
- I'll do it in orange.
- And the latest numbers are about 15 million.
- That's unemployed.
- So the very simple way that they actually calculate the
- number-- but we'll see there's a little bit more nuance than
- what the formula might speak to at first-- is that the
- unemployment rate, this color, is equal to the number of
- I'll do it in that same orange color.
- So unemployed divided by the labor force.
- And the labor force is made up of the unemployed plus, as you
- would imagine, the employed.
- So in this example, to figure out the unemployment rate,
- there were 15 million who were unemployed, so they put 15
- million up there in the numerator, and then the
- denominator would be this entire labor force.
- So it would be the 15 million who were unemployed and then
- whatever 154 minus 15 is.
- What is that?
- It's 139 million who are gainfully employed.
- This number right here is 139.
- This number right here is 15.
- You add them together you get the labor force.
- That's 154 million people.
- Now that seems straightforward enough.
- I think if you do the math here, you get something that's
- close to 10%.
- But what I want to focus on is the definitions of unemployed
- and the labor force, because they're a little different, at
- least from my point of view, than how the term is used.
- According to the Bureau Of Labor Statistics, unemployed
- is someone who essentially doesn't have a
- job but wants one.
- And the way they measure whether you want to have a job
- is, you've looked for a job in the past four weeks.
- So if I was trying to find a job, sending my resume around,
- and then I just got fatigue from interviewing and I took
- five weeks off, I would not be considered unemployed.
- And that's an important thing to think about.
- If the economy were to be so bad-- Let's say in week one I
- am part of the unemployed.
- I don't have a job but I'm looking for a job.
- So I'm sitting right there and I am part of the labor force.
- I'm not employed but I'm unemployed looking for a job.
- But let's say after several weeks of
- this, I just get tired.
- I'm like, you know what, I'm just going to take a few
- months off.
- I'm not even going to look for a job-- things are so bad--
- until things get better.
- What happens is that I go and join a pool of people outside
- of the labor force.
- So instead of being part of the labor force, or part of
- this employed group right here, if I take more than a
- four week-- If I take essentially four and a half
- weeks where I don't look for a job, I go into a new bucket
- called marginally attached workers.
- And that's part of the people who aren't in the labor force.
- All of a sudden I'm not in the labor force.
- So just like that you're taking me out of the numerator
- and you're also taking me out of the denominator.
- So that actually could improve the unemployment rate.
- I want to make this very clear because this is a non
- intuitive idea.
- That the economy could be so bad, that because I jump out
- of the labor pool, the unemployment rate could
- actually improve.
- Let me do this with very simple numbers just to make it
- a little bit clear.
- Let's imagine a world where the entire potential working
- adult population has three people in it.
- So there's three adults.
- People old enough to work.
- And let's say the subset of that adult population, that we
- right now consider part of the labor force, let's say there's
- two people.
- Obviously these are extreme numbers, but I think it'll
- show you how the math can work out.
- Now let's say, out of those two people in the labor force,
- one of them is unemployed.
- Obviously if there's two people in the labor force, one
- is unemployed, then the other person is employed.
- And then there's one more adult out there who's maybe in
- school or is a homemaker or maybe a retiree, but we don't
- know exactly what they are.
- And let's say I'm this unemployed person right here.
- Let's say I keep looking for a job but at some point I've
- gotten rejected so much, and the news I hear is so dire,
- that I just decide to take a break, or take some rest, or I
- just become depressed about my lot in life and I just stop
- looking for a job.
- I become discouraged.
- What happens, according to the Bureau Of Labor Statistics, is
- I am no longer part-- so this is before.
- This is while I'm trying.
- But if I give up.
- Essentially, if I become so discouraged that I stop
- looking for work for more than four weeks, then the new way
- that we would have to draw that diagram out-- our little
- three person country is, we would still
- have the three adults.
- But now, instead of being unemployed since I've given
- up, I'm now not part of the labor force.
- Because I'm not looking for work.
- So now the entire labor force is just going to be that one
- dude with the job.
- So one person.
- And there'll be no unemployment.
- Because there's no-one in the labor force who
- doesn't have a job.
- I would have jumped into this bucket right here.
- I would now be out here.
- This is me.
- Well, I meant to draw that as a set but I turned it into a
- frowny face.
- But this is me right here.
- So what actually happened over here?
- I had a 50% unemployment rate.
- 1 divided by 2.
- 1 divided by the entire labor force.
- That's 50% unemployment, which is obviously
- another extreme number.
- But now, in this situation, because I've dropped out of
- the labor force because I was so discouraged, I now don't
- get counted.
- So here you have 0% unemployment.
- And if you just superficially looked at the numbers-- and
- there are other scenarios you can think about, where either
- the numerator or denominator changes because people get
- encouraged or discouraged or decide to be a homemaker or go
- back to school or come out of the military,
- whatever it might be.
- I just want to show you that something very
- non intuitive happened.
- Because the economy was so bad, I jumped out
- of the labor force.
- And because I jumped out of the labor force, the
- unemployment rate looks superficially positive.
- It went from 50%, in this example, to 0%.
- Obviously in the real world you're not going to see this
- type of extreme behavior because you have more than
- three people, you have 304 million people.
- But what I wanted to do is show you the nuance of how
- this is calculated.
- And I don't think anyone is trying to mislead anyone, but
- what is happening is that they have to draw some threshold of
- what it means to be part of the labor force.
- And that's this notion of looking for a job in the past
- four weeks.
- Your brother-in-law who's living in your basement, you
- might consider him to be unemployed, but the Bureau Of
- Labor Statistics considers him to be, if he hasn't looked for
- a job in the last four weeks, discouraged or perhaps
- marginally attached.
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