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Video transcript

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 u.s. population population and right now if my numbers are correct the latest numbers are 304 million people now not all of those 304 million people are capable of working including my two and a half year old son or my my newborn daughter so you have to think of what when you think about 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 is essentially an adult whose 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 that this is 100 sorry this right here is 237 million people 237 million people now we can't just say all of these people are 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 we want to just 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 so let me draw that right over here so this right over here is the labor force labor force so these are not retirees or people who are in college those people would be sitting right over there assuming they're 16 years or older the labor force so this is working or or I should say 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 actively looking or work and that number my numbers are correct is the right around 154 million although the numbers here aren't 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 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 unemployed unemployed and actively looking 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 at around 15 million people 15 million people so if you have a job you're right over here if you don't have a job but are actively looking you are 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 but you could be working you could you would actually be sitting out here and this is going to be interesting when we think about trends and the unemployment rate when it goes up or down but just to see how the unemployment rate is calculated let's use do it for this example so the unemployment rate unemployment rate employment rate is literally is literally just the number of unemployed over the entire labor force so in this situation it would be 15 million so that's just the number of unemployed and actively looking over the entire labor force over 154 million and so if we get I get my handy ti-85 out that gives us in this example right over here an unemployment rate of 15 divided by 154 million so it's about nine point seven if we if we write it as a decimal zero point zero nine seven if we write it as a percentage this would be nine point seven percent so this is this is approximately nine point 7% now I told you that the details are going to be important and the reason why they are is because 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 let me do this in a new color in the past four weeks past four weeks and you might say Sal how do you know how do they know whether these 15 million people are have actively searched for jobs in the past for four weeks and the answer is they do a survey they're not going to survey every human being in the labor force or the u.s. 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 people 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 four weeks if you have looked for a job in the past four weeks in an unemployed person you get thrown into this bucket right here you're actively looking you're still part of the labor force but if you've gotten 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 into you get thrown out of the labor force and that is what I think most people don't realize if things get bad enough and people get really discouraged you have people not going not you have people actually exiting the entire labor force and to see how that affects the numbers imagine a situation so this is the unemployment rate right now there's 15 million people who are unemployed and actively looking for work let's say that this is just a horrible recession or depression and five million of these people get so discouraged they don't they don't in the last four weeks they do not look for work anymore so they maybe even stopped altogether or they want to take a break so what we're gonna do is we're gonna take five million people out of this bucket over here so we're gonna take five million 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 ten million it's now going to be ten million 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 one hundred and forty nine million so in this in this bad situation where people have left the labor force the unemployment rate would now be ten million people unemployed and actively looking for work over a labor force of 149 million the labor force has shrunk because they're so discouraged so what do we get there's our unemployment rate we have ten divided by one hundred and forty nine it gives us 6.7% so this is this is fascinating if things get bad enough and people actually exit the labor force then the unemployment rate could go down because the labor force is shrinking the other thing could also happen maybe things get really good maybe things get really good and you have ten million people who are sitting out here ten million people said who are sitting out here they're either marginally attached workers which are people who have who are hoping to get a job but haven't looked for a job in the past four weeks or they could be discouraged workers who've all together they wouldn't mind working but they've given up altogether looking but you can imagine it when the economy gets good let's say we're starting from this baseline here the economy gets good and all of these people who are unemployed but not part of the labor force all of a start all of a sudden start looking for work so then they'd be part of the official unemployed so this ten million would grow to 20 million 20 million so now this number is 20 million and this green area would go up by 10 million so now this would be a hundred and fifty nine million so in this situation the official unemployed would be twenty million and the entire labor force would be 159 million and now you would get a situation so you have twenty divided by 150 9 million which is 12.6% 12.6% approximately twelve point six percent 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 and in particular that one number just two and there's there's other unemployment rates that give a little bit more nuance here but this this one headline unemployment rate that's typically given on the news doesn't capture the whole story and 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 the how bad things are and it also doesn't capture the people who are entering the labor force and that situation the unemployment rate would probably make things look worse than they are when things might actually be improving