Unemployment Rate

The unemployment rate typically seems pretty straightforward, right? It is just how many people are unemployed at the moment. Unfortunately, it is not that simple. Otherwise, you might not be here, reading this explanation, hoping that it will answer all of your questions about the unemployment rate. In this explanation, we will take a look at the definition of the unemployment rate, how it is calculated, and what it tells us. Does that sound interesting to you? Let's go!

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Table of contents

    Unemployment Rate Definition

    Let's start by looking at the unemployment rate definition. The unemployment rate is the percentage of people in the labor force that is unemployed at any given time. To understand who is included in this statistic, we have to understand the labor force and who counts as unemployed. The labor force is the group of people who are 16 years or older, including those who are employed and those who do not have a job but are actively seeking employment. People under the age of 16, institutionalized, or not actively seeking employment are not included in the labor force. An unemployed person has to be actively seeking employment to be included in the labor force.

    The unemployment rate is the percentage of people in the labor force that is unemployed at any given time.

    The labor force consists of people 16 years and older who are employed or able to work and actively seeking employment.

    Unemployment Rate Circles showing the three different population groups StudySmarter

    Fig. 1 - Three population groups are taken into account when calculating the unemployment rate.

    Figure 1 shows the three groups that the U.S. Bureau of Labor Statistics (BLS) divides the population into to determine the labor force. The BLS does not include children under the age of 16 years old in the labor force since many states have regulations about minors working and requiring school attendance. The BLS also does not include people who are not available to be used as resources for production. This includes prison inmates, active military personnel, and those in mental health institutions. The other group of people not included in the labor force are people completing their education such as university students, retirees, or stay-at-home parents.

    If we exclude population groups one and two, we are left with group three providing the labor force. The US labor force participation rate for August 2022 was 62.4%, meaning that 62.4% of the total US population was either working or willing and able to work.1

    Under-employment

    The unemployment rate might seem like it encompasses many different scenarios of a person's work status, but it has its shortcomings. Two things that the unemployment rate omits are:

    • Underemployment
    • Discouraged Workers

    Currently, the BLS does not distinguish between part-time and full-time employment when calculating the unemployment rate. Both are counted as full-time even if the part-time worker wants to work full-time or could not find full-time employment. These workers are underemployed. By not factoring in underemployment the unemployment rate is often criticized for seeming lower than it truly is.

    Then there is the problem of discouraged workers. These are people who were seeking jobs but eventually gave up because they were unsuccessful. Since they are no longer actively seeking work they fall out of the labor force and into the second population group. This further contributes to the underestimation of the unemployment rate.

    Unemployment Rate Formula

    Now that we have a solid understanding of the unemployment rate, let's look at the unemployment rate formula. The two values required to calculate the unemployment rate are the number of people who are unemployed and those in the labor force. To calculate the unemployment rate you have to divide the number of unemployed by the total labor force and multiply it by 100 to receive a percentage:

    \[ \frac {Number \ of \ Unemployed} {Labor \ Force} \times 100 = Unemployment \ Rate \]

    Sunnyville has a total population of 55,000 people. Of those people, 37,000 are a part of the labor force because they are either employed or are looking for work.

    4,450 are currently unemployed. What is the unemployment rate for Sunnyville?

    \( \frac {4,450} {37,000} \times 100= \)

    \( 0.12 \times 100=12\% \)

    The unemployment rate for Sunnyville is 12%

    Now let's calculate the unemployment rate of the US in 2021. The labor force in August 2021 was 161,788,000 people. The number of people unemployed was 8,556,000 people.

    \( \frac {8,556,000} {161,788,000} \times 100= Unemployment \ Rate \)

    \( 0.53 \times 100=5.3 \% \)

    The US unemployment rate for August 2021 was 5.3%2

    Significance of the Unemployment Rate

    So we have learned to calculate the unemployment rate, but what do those numbers mean? The unemployment rate is a statistical way of indicating how difficult it is to find a job in the current economy. If a nation has a high unemployment rate, there are a lot of people who are out looking for work but are unsuccessful. If the unemployment rate is low, then it is relatively easy to find a job.

    Low UnemploymentNormal UnemploymentHigh Unemployment
    <4%4-5%>5%
    Table 1 - Guide for what is a low, normal, and high unemployment rate.

    There is no solid guideline for what a high or low unemployment rate is. Using the natural rate of unemployment as a benchmark for what a normal unemployment rate is, we can estimate if the unemployment rate is considered low and the economy is very close to full capacity. An unemployment rate above the natural rate is an indicator that people are having a difficult time finding work. In the US, in 2019, the natural rate of unemployment was 4.6%.3

    Natural Rate of Unemployment

    The natural rate of unemployment is the rate around which the unemployment rate fluctuates. A degree of unemployment is normal for an economy since the likelihood of everyone having a job at the same time is nearly nonexistent. People may need to switch jobs, be let go, or only be contractually employed which accounts for a persistent amount of people being unemployed at any given time.

    Unemployment Rate US

    The unemployment rate in the US typically floats between 4-5%.3 At any given time there are people who are just entering the labor force, are laid off, or quit one job to find a new one.

    Unemployment Rate Chart showing the average US unemployment rate between the years 1948 and 2021 StudySmarter

    Fig. 2 - Average Annual US Unemployment Rate from 1948-2021. Source: U.S. Bureau of Labor Statistics

    Figure 2 shows the average annual unemployment rate for the US since 1948. The highest average annual rate was 9.6% unemployment in 2010, two years after the Great Recession when the economy was still trying to recover from the housing bubble crash. The highest monthly unemployment rate was recorded in April of 2020 during the COVID19 pandemic, at 14.7%.4

    The 1980s also saw an elevated unemployment rate from 1981 to 1983 at close to 11% unemployment.4 This recession was caused by the Federal Reserve's (the Fed) tight contractionary monetary policy that had been instated to combat rising inflation.5 The high inflation was said to be caused by the government's increased deficit spending of the 1970s.6 Eventually, the Fed was able to lower inflation to 5% by maintaining a higher interest rate and the unemployment rate started to decrease.5

    Curious about monetary policy? We have a great explanation that will help you familiarize yourself with the topic!

    - Monetary Policy

    Unemployment Rate in The Great Depression

    We cannot learn about the unemployment rate without mentioning the unemployment rate in the Great Depression. Although the US has gone through multiple severe recessions none has surpassed the massive loss of Gross Domestic Product (GDP) and levels of unemployment seen during the Great Depression of 1929. Unemployment rate in the Great Depression was as high as 24.5% at the height of the depression in 1933.7 It was caused by a combination of factors. The collapse of the stock market in 1929 and the overproduction of goods caused prices and therefore wages and employment to drop.7 US production fell by one-third and prices plummeted, leaving workers either unemployed or having to accept much lower wages.7 Fear and a lack of confidence caused people to save whatever wealth they had, further stalling the economy until the election of a new president in 1933 brought new economic policies.

    The high unemployment and depressed wages started to improve after President Franklin D. Roosevelt instated his New Deal policy that created jobs for the unemployed, helped stabilize farming prices, provided unemployment support, and introduced the Social Security Insurance program.7 People were put to work building roads, dams, and other infrastructure for the country that connected the country and stimulated manufacturing again.

    Lowest Unemployment Rate

    The lowest unemployment rate came for the US during the post-war boom.4 The unemployment rate fell to 2.5% in May and June of 1953. It came in the wake of World War II when people were hopeful for the future. It was in the middle of the Baby Boom generation when GDP was growing rapidly, and the consumer culture took off.8 Where the rest of the world was still building back from the wreckage of World War II, the US had a head start to ramp up production of goods. This created jobs, making it possible for nearly anyone to find work.8

    Unemployment Rate UK

    The unemployment rate for the United Kingdom follows a very similar trend to the unemployment rate in the US. This is because they are both powerful nations whose economies are closely linked by both politics and trade. Just like the US, the UK experienced a period of high unemployment in the early 1980s reaching 11.8% due to high levels of inflation and harsh economic policies that drove the UK economy into a recession.9, 10 Some argue that the strict monetary policies were necessary to curb long run issues like high inflation, poor industrial relations, and economic decline.10

    This explanation has mentioned inflation a few times, but there is so much more to the topic. Check out some of our explanations on inflation to learn more about it!

    - Types of Inflation

    - Causes of Inflation

    - Effects of Inflation

    Unemployment Rate Chart showing the average UK unemployment rate between the years 1971 and 2021 StudySmarterFig. 3 - Average UK unemployment rate from 1971-2021, Source: Office for National Statistics

    Figure 3 shows the average annual unemployment rate for the UK from 1971 to 2021. If we compare it to figure 2, we can see how both unemployment rates follow a similar pattern. In 2008, the UK also suffered from the 2008 financial crisis. Many of its banks had also participated in the practice of handing out sub-prime mortgages to those who could not afford them in the name of making money and retaining market shares.11 This practice became an issue for banks globally in 2007, when the price of oil began to rise along with fear of recession and unemployment. The rising unemployment caused people to default on their loans, causing a global snowball effect.11

    The current unemployment rate for the UK for June 2022 is at 3.6%, which is 0.9% less than the 2021 annual average.9 This is the lowest rate the UK has seen since 1974 when it was 3.7%.9

    The unemployment rate is often thought of as an indicator of an economy's overall health, seeing the similar trends between the US and UK unemployment rates just goes to show how linked the two economies are.

    Unemployment Rate - Key takeaways

    • The unemployment rate is the percentage of people in the labor force that is unemployed at any given time and is a statistical way of indicating how difficult it is to find a job in the current economy.
    • Not every adult in the population is considered to be part of the labor force. Only those who are currently working or able to work and are actively seeking employment are considered in the calculation of the unemployment rate.

    • Those who are able to work and would like a job but are not actively seeking work anymore are called discouraged workers and are not counted in the unemployment rate.

    • The unemployment rate formula is:

      \[ \frac {Number \ of \ Unemployed} {Labor \ Force} \times 100 = Unemployment \ Rate \]

    • The lowest unemployment rate in US history was in May 1953 at 2.5% while the highest was 24.5% in 1933 during the Great Depression.


    References

    1. Division of Labor Force Statistics, Civilian labor force participation rate, U.S. Bureau of Labor Statistics, August 2022, https://www.bls.gov/charts/employment-situation/civilian-labor-force-participation-rate.htm
    2. Division of Labor Force Statistics, Employment status of the civilian population by sex and age, September 2022, https://www.bls.gov/news.release/empsit.t01.htm
    3. Congressional Budget Office, August 2019, Supp Table 2, https://www.cbo.gov/data/budget-economic-data#6
    4. U.S. Bureau of Labor Statistics, Labor Force Statistics from the Current Population Survey, 2022, https://data.bls.gov/pdq/SurveyOutputServlet
    5. Tim Sablik, Recession of 1981–82, Federal Reserve History, November 2013, https://www.federalreservehistory.org/essays/recession-of-1981-82
    6. Michael Bryan, The Great Inflation, November 2013, https://www.federalreservehistory.org/essays/great-inflation
    7. What was the Great Depression?, FDR Library, https://www.fdrlibrary.org/great-depression-facts
    8. History.com, The 1950s, June 2010, https://www.history.com/topics/cold-war/1950s
    9. Debra Leaker, Unemployment rate (aged 16 and over, seasonally adjusted): %, September 2022, https://www.ons.gov.uk/employmentandlabourmarket/peoplenotinwork/unemployment/timeseries/mgsx/lms
    10. Christopher A. Pissarides, UNEMPLOYMENT IN BRITAIN: A EUROPEAN SUCCESS STORY, July 2003, https://www.ifo.de/DocDL/cesifo_wp981.pdf
    11. The Financial Crisis and its Impact on the UK and other Economies, University of Liverpool, https://archive.learnhigher.ac.uk/resources/files/business%20comm%20awareness/The%20Financial%20Crisis%20and%20its%20Impact%20on%20the%20UK%20and%20other%20Economies.pdf
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    Frequently Asked Questions about Unemployment Rate

    What is the unemployment rate in the UK?

    The unemployment rate in the UK was 3.6% in June 2022.

    What is the lowest unemployment rate in US history? 

    The lowest unemployment rate in US history is 2.5% in May and June of 1953.

    What was the unemployment rate during the great depression?

    The unemployment rate during the great depression was 24.5% in 1933.

    How do you calculate the unemployment rate? 

    The unemployment rate is calculated by dividing the number of people unemployed by the labor force and then multiplying the answer by 100 to receive a percentage. 

    Unemployment  Rate = Number of Unemployed / Labor Force X 100  

    What is the definition of unemployment rate?

    The definition of unemployment rate is the percentage of people in the labor force that are unemployed at any given time. 

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