The the unemployment rate is one of the most widely followed indicators used by businesses, investors and others to gauge the health of the US economy. Investor sentiment and consumer confidence have strong inverse relationships with the US unemployment rate.

When the unemployment rate rises, investors guard their money more closely and consumers become reluctant, fearing economic calamity. When the rate is low, people are more confident in the economy and it shows in their investment and spending patterns.

Bureau of Labor Statistics survey

Despite what many people believe, the unemployment rate is not measured by counting the number of people collecting unemployment insurance. In fact, the government comes up with this long-awaited number every month, following a process that is more like US Census.

The unemployment rate is measured by a division of a Department of Labor known as Bureau of Labor Statistics (BLS). This government agency conducts a monthly survey called Current Population Survey involving 60,000 households. These households are selected using random sampling methods designed to generate as close an approximation as possible to the larger population.

The number of households in the sample may seem small, especially compared to the more than 337.4 million people living in the U.S. However, it is actually quite large compared to most public opinion polls, which typically include around 1,000 participants, sometimes even fewer. Each month, US Census workers contact sample households and ask specific questions to determine employment status.

The first piece of information they want to determine is how many people in the household are actually in the labor force, that is, those people have jobs or are actively looking for jobs. Only residents who are in the labor force are counted in the unemployment rate. Someone who doesn’t have a job but claims they aren’t looking for one is considered out of the labor force and not counted in the unemployment rate. Economists call the members of this group “discouraged workers.”

For example, suppose that in a given month, the BLS collects information on a total of 100,000 people from the 60,000 households surveyed. A total of 25,000 of these people claim they do not have a job and are not actively looking for one. These people are classified as not in labor force. They are not counted in the unemployment rate.

The remaining 75,000 people claim to be active members of the labor force, either having a job or actively looking for one. Of these respondents, 70,000 are gainfully employed, while the remaining 5,000 are unemployed but looking for work. Therefore, 93.3% of respondents in the labor force are employed; the remaining 6.7% are considered unemployed. The the official unemployment rate for that month is 6.7%.

The survey controversy

Continuing with the example above, although there are still 25,000 unemployed people in the survey, because they are considered out of the labor force, they are not considered unemployed in terms of the official unemployment rate.

This is a controversial issue because many believe that the unemployment rate excludes large numbers of people who are no longer in the labor force, not because they do not want a job, but because they have simply given up looking. Therefore, some people argue that the unemployment rate presents a brighter picture than reality.

There actually is six different unemployment rates which measure different levels of employment. These can be used to provide a clearer assessment of the labor market from different perspectives.

conclusion

The US Bureau of Labor Statistics uses the Current Population Survey to estimate the unemployment rate. The unemployment rate only considers those in the labor force; those working or not working but actively looking for a job. Many critics believe that this underestimates the true unemployment rate. The Bureau of Labor Statistics has six different unemployment rates to account for varying degrees of unemployment.