Unemployment Rate Primer (v2) How the unemployment rate is calculated
Unemployment Rate Primer (v2)
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- What I want to do in this video
- is think a little bit about
- how the unemployment rate is actually computed
- by the bureau of labor statistics.
- So to figure that out, let's just start off
- with the entire US population. So let me
- draw a big circle here that represents the entire US population.
- US population, and right now, if my numbers are correct
- the latest numbers are 304,000,000 people.
- Now, not all of those 304 million people are capable of working
- including my 2 1/2 year old son, or my new born daughter,
- so, you have to think, when you think of unemployment
- you want to think about the percentage of these people that are actually old enough
- to work, that actually can be employed theoretically.
- So let's take a subset of that US population
- and let's think about who's essentially an adult
- who's working age?
- So this subset right over here is 16 years
- and older. So people who can legally work
- and the numbers I have here, this is 100
- sorry, this right here is 237,000,000 people
- Now, we can't just say all of these people could possibly work
- because a lot of them are in college
- some of them are in high school, some of them might not have
- the ability to work, some of them might be retired,
- so what we want to do is take a subset of this
- population that is essentially you could say,
- part of the labor force, in that they are working
- or they are actively looking for work.
- Let me draw that right over here.
- So this right over here is the labor force.
- So these are not retirees, or people who are in college
- those people would be sitting right over there
- assuming they are 16 years or older.
- The labor force, this is working and actively looking for work
- and we'll think about what actively looking for work means
- in a little bit more depth in a few minutes.
- Actively looking for work.
- And that number, if my numbers are correct,
- is right around 154,000,000. Although the numbers
- here are not so important, the more important thing
- is the idea of how the unemployment rate itself is calculated.
- And then so within the labor force, you have a subset
- So this is working and actively looking for work.
- So you have a subset of the labor force that is actively looking for work.
- So they don't have a job, but they're actively looking.
- So this right here is unemployed
- and actively looking, this actively looking
- is probably more important than you might realize at first.
- And this number, let's just say for the sake of argument
- this is sitting around 15,000,000 people.
- So if you have a job, you're right over here,
- if you don't have a job, but are actively looking
- you're going to be right over here.
- What we're going to see in a little bit is
- if you have, if you don't have a job, but you are
- not actively looking, you could be working
- you would actually be sitting out here.
- This is going to be interesting when we think of trends
- and the unemployment rate, when it goes up or down.
- But just to see how the unemployment is calculated
- let's use, let's do it for this example.
- So the unemployment rate
- is literally just the number of unemployed,
- over the entire labor force.
- So in this situation, it would be
- 15,000,000, so that's just the number of unemployed
- and actively looking, over the entire labor force
- Over 154,000,000. So if we get my handy TI 85 out
- that gives us in this example right over here
- and unemployment rate of 15 divided by 154 million.
- So it's about 9.7, if we write it as a decimal, it would be 0.097
- if we write it as a percentage, this would be 9.7%
- so this is approximately 9.7%.
- Now I told you that the details are going to be important
- And the reason why they are is interesting things happen
- when people stop looking for work, or when they
- start looking for work.
- So I said "unemployed and actively looking"
- puts you in this bucket over here.
- If you're unemployed, if you don't have a job
- and you're not actively looking
- you're actually not in the labor force.
- And so you might be saying, "Sal, what does it mean
- to be actively looking for work?"
- And this means that you've looked for a job
- or you're actively searching in the past
- We'll do this in a new color
- in the past 4 weeks
- And you might say "Sal, how do they know whether these 15 million people,
- have actively searched for jobs in the past 4 weeks?"
- And the answer is they do a survey.
- They're not going to survey every human being in the labor force
- or the US population, or all 15 million
- that are unemployed, that would be logistically impossible
- what they do is they do a survey
- and right now they do about 60,000 every month
- and they essentially ask them,
- are you employed?
- are you unemployed?
- if you are unemployed, have you looked for a job
- in the past 4 weeks?
- If you have looked for a job in the past 4 weeks
- as an unemployed person, you'd get thrown into this bucket
- right here, you're actively looking, you're still part of the labor force
- but if you've got so discouraged that you're no longer
- looking for work, maybe you've given up
- then you get thrown out of here, you get thrown
- out of the labor force. And that is what most people
- don't realize, when things get bad enough
- and people get really discouraged,
- you have people not going,
- you have people actually exiting the entire labor force
- and see how that affects the numbers
- imagine a situation, so this is the unemployment rate
- right now, there's 15,000,000 who are unemployed
- and actively looking for work. Let's say that this
- is just a horrible recession or depression
- and 5,000,000 of these people get so
- discouraged, they don't, in the last 4 weeks
- they do not look for work anymore.
- So they've maybe stopped altogether or they want to take a break
- so what we're gonna do, is we're going to take
- 5,000,000 people out of this bucket over here,
- so we're going to take 5,000,000 people and move them
- out over here. Outside of the labor force.
- If you did that what happens?
- Well now, the number, the official unemployed number
- is now going to be 10,000,000
- and what's the labor force number?
- Remember, they went completely out of this green circle over here
- So they also left the labor force,
- so the labor force number is now 149,000,000
- So in this bad situation, where people have left the labor force
- the unemployment rate would now be 10 million people
- unemployed and actively looking for work
- over a labor force of 149,000,000.
- The labor force has shrunk because they're so discouraged
- so what do we get there as our unemployment rate?
- We have 10 divided by 149
- it gives us 6.7%
- So this is fascinating, if things get bad enough
- and people actually exit the labor force
- then the unemployment rate could actually go down
- because the labor force is shrinking.
- The other thing could also happen,
- maybe things get really good and you have
- 10,000,000 people who are sitting out here
- they're either marginally attached to workers,
- which are people who are hoping to get a job,
- but haven't looked for a job in the past 4 weeks
- or they could be discouraged workers
- who would mind working, but they've given up altogether looking
- but you can imagine when the economy gets good
- let's say we're starting from this baseline
- here, the economy gets good, and all these people
- who are unemployed, but not part of the labor force,
- all of a sudden start looking for work.
- So then they'd be part of the official unemployed
- So 10,000,000 would grow to 20,000,000
- So now this number is 20 million, and this green area
- would go up by 10 million,
- so now this would be 159 million,
- so in this situation, the official unemployed would be
- 20 million, and the entire labor force would be
- 159 million, and now you get a situation
- so you have 20 divided by 159 million,
- which is 12.6%
- Approximately 12.6%
- So the whole point of this video,
- I'm not saying that the unemployment rate is
- the way it's calculated is wrong, or that it's
- supposed to be misleading,
- I just want to give you a little bit of nuance
- that it doesn't always give the complete picture
- in particular, that one number, just this
- and there's other unemployment rates that give
- a little bit more nuance here, but this one
- headline unemployment rate that's typically given on the news
- doesn't capture the whole story, in particular
- it doesn't capture the people who might be exiting
- the labor force when things are bad, so in that situation
- the unemployment rate would probably be
- understating how bad things are.
- And it also doesn't capture the people who are entering the labor force
- in that situation the unemployment rate
- would probably make things look worse than they are
- when things might actually be improving.
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