## Sunday, August 30, 2009

### What is the unemployment rate, anyway?

To kick off unemployment week, I start by defining what we mean by the unemployment rate:

From the Bureau of Labor Statistics,

People with jobs are employed.
People who are jobless, looking for jobs, and available to work are unemployed.
If you are employed or unemployed, you are in the labor force. Other people (not looking for jobs) are not in the labor force. The unemployment rate is the percent of people in the labor force who are unemployed.

How does the government know enough to compute the unemployment rate every month? The short answer is that the government does not have enough information about every individual in the United States to compute the unemployment rate.

The long answer is that the government uses a representative sample of the population to estimate the true unemployment rate. The Bureau of Labor Statistics surveys 60,000 households on labor force activities to gather data for a precise estimate of employment, unemployment and the unemployment rate.

If you have taken introductory statistics, you know that this method is great. In fact, after 1000 households are sampled, you should feel comfortable that the number is about right... just so long as the sample is representative of American workers in the labor force. That's just the law of large numbers at work.

Are there any problems with the unemployment rate?
In computing the unemployment rate, we would really like to know the percentage of people who who would like to work, but who are unable to find a job. But, that's not quite what the unemployment rate is.

To be unemployed, you have to be looking for employment. If you are without a job, but you gave up looking because of bad prospects, you're not unemployed (at least according to government statistics). There's a term for workers who gave up looking: discouraged workers.

Discouraged workers are part of what the Bureau of Labor Statistics calls marginally attached to the labor force. These are people who would work if they had a job offer, but they're not looking because looking for a job is costly and they don't expect much payoff to looking for a job.

So, the unemployment rate does not account for discouraged workers. Therefore, the unemployment rate is an underestimate of "fraction of people who want to work, but aren't working." So, what does the unemployment rate look like nationwide, in Illinois, and in Montana?

According to Google's public data, the unemployment rate is 9.7 percent nationwide, 10.5 percent in Illinois, and 6.1 percent in Montana. Now, there's another reason to move to Montana!

At 9.7 percent, the national unemployment rate is a cause for concern. Nearly one in ten labor force participants are jobless. Those aren't good odds. Throw in discouraged workers, and we have a dismal start to unemployment week. But don't let that discourage you from coming back.

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This is the first post in unemployment week on This Young Economist. When you lose your job, what happens to your skills? That's the question I tackle in tomorrow's post.