What is the Unemployment Rate?

The unemployment rate is the percentage of our population that is employed within the labor force. The labor force is the percentage of the population that is able to and willing to work. It’s also important to note that the labor force excludes students, retirees, full time homemakers and anyone else that is unable (disabled) nor seeking work. This means it will exclude what is known as permanently unemployed persons or discouraged workers from the calculation.

The Statistics

Unemployment data is derived from the Bureau of Labor Statistics and subsequently the Department of Labor. However, many economists and other financial experts will use secondary and tertiary data to better gauge unemployment activity. This can include non-farm payroll data from the BLS, ADP payroll data (which is a private payroll company, not a government entity), seasonally adjusted unemployment data, etc.

It is calculated by dividing the total amount of unemployed persons within the economy by the total population in the labor force. Also, important to note here, is the labor force participation rate. The labor force participation can change vastly depending on the age of the population (excessive retires and students means there will be a lower percentage of the population in the labor force).

Labor Force Participation

The unemployment rate is limited in the fact that it is not apple to fully account for the “entire” labor force due to discouraged workers and permanently unemployed individuals. After 12 months of unemployment, a portion of the labor force is removed from the unemployed categorization. These workers no longer get counted towards the unemployment ratio so this can greatly skew the “real” rate of unemployment.

In essence, if there are many discouraged/displaced workers, the real unemployment rate is not properly calculating the real percentage of the population that is unemployed. This is likely to occur after prolonged recessions as unemployed individuals will be considered discouraged after 12 months.

What About the Great Recession?

After the Great Recession (as well as the Great Depression), many people completely fell out of the labor force after 12 months of unemployment, so even after the economy rebounded, the unemployment rate was not necessarily showing the full economic picture. Essentially, it wasn’t taking into effect individuals that never re-entered into the labor force.

On the flip side, during this more recent period of economic expansion, new jobs exceeded expectations and actually caused the unemployment rate to decrease numerous times. Basically, this means that people were joining the labor force and again skewed unemployment numbers.

Long Term Unemployed

Just because someone has been considered out of the labor force due to long term unemployment, this doesn’t mean that they can’t come back into the labor force and become re-included in the participation rate. This happens a lot more than you’d think as people are constantly exiting, entering and re-entering the labor force.

For example, let’s say unemployment and job expectations were 4.3% and 180,000 respectively in previous quarters during 2018, 2019, etc. However, the data reported was showing something else. The jobs numbers beat, adding 250,000 instead of 180,000 jobs. But the unemployment rate still went up from 4.3% to 4.4%. This means that people that were long term unemployed or discouraged and not being counted in the labor force, came back into the labor force and caused the unemployment ratio to skew.

The main issue with the unemployment numbers is that they can often times miscalculate the true labor force participation rate. This in turn can lead to unemployment data that is skewed.