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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. population. 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 unemployed. 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.