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Current time:0:00Total duration:9:38

Video transcript

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 so what I'm going to start with I'm just gonna draw a big diagram right here so let's say that that big circle represents the entire US population so that's the US population and 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 ten month old son so obviously if we're talking about unemployment he eat at least shouldn't be relevant not 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 16 years and older and that I'd looked at up as of November that was about 237 million people in the US but then there's a subset of that because you know that 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 so that right there I ever use that color let me do it in I'll do it in green so that right there in green is the labor force labor force and as of November those numbers I just saw her right are 154 million people and then there's sub subset of the labor force that the Bureau of Labor Statistics considers unemployed unemployed I'll do it in orange unemployed the latest numbers are about 15 million 15 million unemployed that's unemployed and employed so just kind of the very simple way that they actually calculate the numbers 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 the unemployment rate unemployment rate is equal to the number of unemployed I'll do it in that same orange color so unemployed unemployed divided by the labor force divided by the labor force and the labor force is made up of the unemployed unemployed plus the as you would imagine the employed plus the employed right there so in this example to figure out the unemployment rate the unemployed so they'd put a fifteen million up there in the numerator and then the denominator would be this entire labor force so it'd be the fifteen million who are unemployed and then the whatever 154 minus 15 is what is that it's a it's 139 million 139 million who are who are gainfully employed so it would be 139 that's so 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 it 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 so 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 looked for job in the past or weeks so if I was trying to find a job and you know I'm sending my resume around and then I just got you know fatigued 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 so let's say I do you know in week one I am part of the unemployed I'm I don't have a job but I am looking for a job so I'm I'm sitting right there I and I am part of the labor force I'm not employed but I'm unemployed looking for a job but let's say you know after several weeks of this I just get tired I'm like you know what I'm just gonna take a few months off or I don't think I'm not even gonna look for a job that things are so bad until things get better what happens is is that I going 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 if I take essentially yet four four and a half weeks where I don't look for a job I go into a new bucket called marginally attached workers marginally attached workers right there and that's part of the people who aren't in the labor force so 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 that guy actually could improve the unemployment rate and I want to make this very clear because this is a non-intuitive idea that the economy could so be so bad that because I jump out of the labor pool the unemployment rate could actually improve and let me let me do this with very simple numbers just to make it a little bit clearer let's imagine a world let's imagine a world where the entire potential working I guess we call them adult population let's say the adult population has three people in it so there's three adults so people old enough 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 make it it'll show you how the math can work out let's say out of those two people in the labor force one of them is unemployed so one of them is unemployed so one unemployed so this simple example obviously if there's two people in the labor force one is unemployed then the other person is employed and then there's another 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 I'm this unemployed person I'm that unemployed person right there let's say I keep looking for a job but at some point I've gotten rejected so much and the the news I hear is so dire that I just decided to take a break or take some rest or I just become depressed about my my lot in life and I just stop looking for a job I've 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 this is while I'm trying but if I give up essentially if I've become so discouraged that I stop looking for work for more than four weeks then the new way that we would have to draw the diagram out are our little three person country is we would still have the three adults 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 I'm 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 and you know I'm now why 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 1/2 one divided by the entire labor force that's 50% unemployment which is obviously another extreme number but on this situation because I've dropped out of the labor force because I was so discouraged I am now I now don't get counted and 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 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 or whatever it might be I just want to show you that something very non-intuitive happens 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% of this example to 0% in the real world you're not going to see this type of extreme behavior because you have more than three people you have three hundred and four million people but what I wanted to do is show you the nuance of of how this is calculated and I don't think anyone is trying to mislead anyone but it's it's but what is happening is that they have to draw some threshold on what it means to be part of the labor force and that's why this notion of looking for a job in the past four weeks so I mean if there is you know if you're if 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 but if he hasn't looked for a job in the last four weeks discouraged or perhaps marginally attached