How does the government determine the unemployment rate?

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The monthly unemployment rate is based on the results of a monthly survey conducted by the Bureau of Labor and Statistics (BLS) called the Current Population Survey (CPS). The CPS surveys 60,000 households or about 100,000 individuals. Households are selected using random sampling methods designed to create an accurate representation of the countries population.

Each month, survey respondents are asked the following questions:

  1. Has anyone worked in the previous week?
  2. Has anyone not worked in the previous four weeks and are looking for work?
  3. Has anyone been looking for work?
  4. Has anyone quit looking for work?

Only people who are working or looking for work are considered to be in the labor force and are included in the unemployment rate. Someone who is not working and is also not looking for work is not considered as being in the labor force and is not counted into the unemployment rate.

For example, suppose 100,000 people from 60,000 households are surveyed. 25,000 of those people claim they are not working and not actively looking for work. These 25,000 people would be classified as not being in the labor force and not counted into the official unemployment rate. Let’s also assume 70,000 respondents claim they are working, while 5,000 claim they are not working but are actively seeking work. This means that 75% (70,000 + 5,000 / 100,000 x 100) of the survey respondents are in the labor force and that the official unemployment rate would be 6.67%. The unemployment rate would be a staggering 30% if those not working and not looking for work were counted into the calculation. Of course, this rate wouldn’t take into account people legitimately not looking for work such are retired people, stay at home parents, etc., so, this isn’t an accurate measure either.

Thankfully, there are more specific metrics called the U-1 through the U-6 which I find to be more accurate. You can read about these here. The reason I’m not covering them in detail here is because the unemployment rate you commonly hear on the news refers to the U-3, and that’s what I wanted to cover here.

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INTERESTING FACTS
  1. The unemployment rate reached 24.9% during the Great Depression.
  2. South Africa currently has the highest unemployment rate in the world at about 27%.
INTERESTING VIDEO

INTERESTING SOURCES
  1. NetCredit.com – How Does the Government Calculate the Unemployment Rate?
  2. Investopedia.com – How is the U.S. monthly unemployment rate calculated?
  3. Forbes.com – The Five Highest Unemployment Rates In The World

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