How Do We Track Unemployment & How Accurate Is It?
The GDP, which measures productivity and economic expansion, is one of the two most important statistics for gauging America’s economic health. The other is the unemployment rate. When people think of the Great Depression, they don’t think of declining output as measured by gross domestic product. They think of people in raggedy clothes holding “will work for food” signs while standing in line for soup. Everyone knows that things are bad when jobs are scarce. What’s less known is how, exactly, the country tracks joblessness in the first place.
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There Are Several Unemployment Rates
The Bureau of Labor Statistics (BLS) is responsible for tracking and reporting all data related to unemployment in the United States. Each month, the BLS releases six different measures of the job market labeled U-1 through U-6. The official unemployment rate is U-3. When the news mentions the unemployment rate, that’s the one they’re talking about. The BLS defines U-3 as the country’s “total unemployed, as a percent of the civilian labor force.”
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‘Labor Force’ Is a Subjective Term
The definition of “labor force” is one of the biggest controversies in American economic policy. According to the BLS, the labor force consists of:
- The employed: People with jobs
- The unemployed: People who don’t currently have jobs, but who are looking for work
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The BLS excludes a large and critical third population from its definition of “labor force”: Those who are neither working nor looking for work. They include:
- The more than 2 million Americans who are incarcerated
- Those who are precluded from working due to a disability or illness
- Those who left the workforce to raise children or who are on parental leave
- Retired people
- Full-time caretakers
- Full-time college students
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A More Complete Measurement Tells a Different Tale
Critics of U-3 argue that the exclusion of these populations is misleading and that the measurement is artificially low. They recommend that the country instead adopt the U-6 designation, which does include these groups and is close to double the official unemployment rate. Unlike the broader U-6 — known as the real unemployment rate — U-3 ignores:
- The many jobless who simply gave up and stopped looking for work
- Students who want to work part time but can’t find jobs
- Caretakers who would work if they could find a job that paid enough to hire a professional caretaker
- Retirees who are unsuccessfully trying to reenter the workforce
- New parents forced to sacrifice income to handle maternity/paternity obligations
- People with illnesses or disabilities who want to work but can’t find jobs
- Millions of prisoners involuntarily removed from the labor force
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There’s a Formula For Calculating the Unemployment Rate
For now, the official unemployment rate remains the standard despite the fact that it excludes more than 2 out of 3 American adults. The unemployment rate is calculated by dividing the number of unemployed people by the total labor force and multiplying the result by 100.
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This article is part of GOBankingRates’ ‘Economy Explained’ series to help readers navigate the complexities of our financial system.
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