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Principles of Macroeconomics for AP® Courses 2e

7.1 How Economists Define and Compute Unemployment Rate

Principles of Macroeconomics for AP® Courses 2e7.1 How Economists Define and Compute Unemployment Rate
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  1. Preface
  2. 1 Welcome to Economics!
    1. Introduction
    2. 1.1 What Is Economics, and Why Is It Important?
    3. 1.2 Microeconomics and Macroeconomics
    4. 1.3 How Economists Use Theories and Models to Understand Economic Issues
    5. 1.4 How To Organize Economies: An Overview of Economic Systems
    6. Key Terms
    7. Key Concepts and Summary
    8. Self-Check Questions
    9. Review Questions
    10. Critical Thinking Questions
  3. 2 Choice in a World of Scarcity
    1. Introduction to Choice in a World of Scarcity
    2. 2.1 How Individuals Make Choices Based on Their Budget Constraint
    3. 2.2 The Production Possibilities Frontier and Social Choices
    4. 2.3 Confronting Objections to the Economic Approach
    5. Key Terms
    6. Key Concepts and Summary
    7. Self-Check Questions
    8. Review Questions
    9. Critical Thinking Questions
    10. Problems
  4. 3 Demand and Supply
    1. Introduction to Demand and Supply
    2. 3.1 Demand, Supply, and Equilibrium in Markets for Goods and Services
    3. 3.2 Shifts in Demand and Supply for Goods and Services
    4. 3.3 Changes in Equilibrium Price and Quantity: The Four-Step Process
    5. 3.4 Price Ceilings and Price Floors
    6. 3.5 Demand, Supply, and Efficiency
    7. Key Terms
    8. Key Concepts and Summary
    9. Self-Check Questions
    10. Review Questions
    11. Critical Thinking Questions
    12. Problems
  5. 4 Labor and Financial Markets
    1. Introduction to Labor and Financial Markets
    2. 4.1 Demand and Supply at Work in Labor Markets
    3. 4.2 Demand and Supply in Financial Markets
    4. 4.3 The Market System as an Efficient Mechanism for Information
    5. Key Terms
    6. Key Concepts and Summary
    7. Self-Check Questions
    8. Review Questions
    9. Critical Thinking Questions
    10. Problems
  6. 5 The Macroeconomic Perspective
    1. Introduction to the Macroeconomic Perspective
    2. 5.1 Measuring the Size of the Economy: Gross Domestic Product
    3. 5.2 Adjusting Nominal Values to Real Values
    4. 5.3 Tracking Real GDP over Time
    5. 5.4 Comparing GDP among Countries
    6. 5.5 How Well GDP Measures the Well-Being of Society
    7. Key Terms
    8. Key Concepts and Summary
    9. Self-Check Questions
    10. Review Questions
    11. Critical Thinking Questions
    12. Problems
  7. 6 Economic Growth
    1. Introduction to Economic Growth
    2. 6.1 The Relatively Recent Arrival of Economic Growth
    3. 6.2 Labor Productivity and Economic Growth
    4. 6.3 Components of Economic Growth
    5. 6.4 Economic Convergence
    6. Key Terms
    7. Key Concepts and Summary
    8. Self-Check Questions
    9. Review Questions
    10. Critical Thinking Questions
    11. Problems
  8. 7 Unemployment
    1. Introduction to Unemployment
    2. 7.1 How Economists Define and Compute Unemployment Rate
    3. 7.2 Patterns of Unemployment
    4. 7.3 What Causes Changes in Unemployment over the Short Run
    5. 7.4 What Causes Changes in Unemployment over the Long Run
    6. Key Terms
    7. Key Concepts and Summary
    8. Self-Check Questions
    9. Review Questions
    10. Critical Thinking Questions
    11. Problems
  9. 8 Inflation
    1. Introduction to Inflation
    2. 8.1 Tracking Inflation
    3. 8.2 How to Measure Changes in the Cost of Living
    4. 8.3 How the U.S. and Other Countries Experience Inflation
    5. 8.4 The Confusion Over Inflation
    6. 8.5 Indexing and Its Limitations
    7. Key Terms
    8. Key Concepts and Summary
    9. Self-Check Questions
    10. Review Questions
    11. Critical Thinking Questions
    12. Problems
  10. 9 The International Trade and Capital Flows
    1. Introduction to the International Trade and Capital Flows
    2. 9.1 Measuring Trade Balances
    3. 9.2 Trade Balances in Historical and International Context
    4. 9.3 Trade Balances and Flows of Financial Capital
    5. 9.4 The National Saving and Investment Identity
    6. 9.5 The Pros and Cons of Trade Deficits and Surpluses
    7. 9.6 The Difference between Level of Trade and the Trade Balance
    8. Key Terms
    9. Key Concepts and Summary
    10. Self-Check Questions
    11. Review Questions
    12. Critical Thinking Questions
    13. Problems
  11. 10 The Aggregate Demand/Aggregate Supply Model
    1. Introduction to the Aggregate Supply–Aggregate Demand Model
    2. 10.1 Macroeconomic Perspectives on Demand and Supply
    3. 10.2 Building a Model of Aggregate Demand and Aggregate Supply
    4. 10.3 Shifts in Aggregate Supply
    5. 10.4 Shifts in Aggregate Demand
    6. 10.5 How the AD/AS Model Incorporates Growth, Unemployment, and Inflation
    7. 10.6 Keynes’ Law and Say’s Law in the AD/AS Model
    8. Key Terms
    9. Key Concepts and Summary
    10. Self-Check Questions
    11. Review Questions
    12. Critical Thinking Questions
    13. Problems
  12. 11 The Keynesian Perspective
    1. Introduction to the Keynesian Perspective
    2. 11.1 Aggregate Demand in Keynesian Analysis
    3. 11.2 The Building Blocks of Keynesian Analysis
    4. 11.3 The Expenditure-Output (or Keynesian Cross) Model
    5. 11.4 The Phillips Curve
    6. 11.5 The Keynesian Perspective on Market Forces
    7. Key Terms
    8. Key Concepts and Summary
    9. Self-Check Questions
    10. Review Questions
    11. Critical Thinking Questions
  13. 12 The Neoclassical Perspective
    1. Introduction to the Neoclassical Perspective
    2. 12.1 The Building Blocks of Neoclassical Analysis
    3. 12.2 The Policy Implications of the Neoclassical Perspective
    4. 12.3 Balancing Keynesian and Neoclassical Models
    5. Key Terms
    6. Key Concepts and Summary
    7. Self-Check Questions
    8. Review Questions
    9. Critical Thinking Questions
    10. Problems
  14. 13 Money and Banking
    1. Introduction to Money and Banking
    2. 13.1 Defining Money by Its Functions
    3. 13.2 Measuring Money: Currency, M1, and M2
    4. 13.3 The Role of Banks
    5. 13.4 How Banks Create Money
    6. Key Terms
    7. Key Concepts and Summary
    8. Self-Check Questions
    9. Review Questions
    10. Critical Thinking Questions
    11. Problems
  15. 14 Monetary Policy and Bank Regulation
    1. Introduction to Monetary Policy and Bank Regulation
    2. 14.1 The Federal Reserve Banking System and Central Banks
    3. 14.2 Bank Regulation
    4. 14.3 How a Central Bank Executes Monetary Policy
    5. 14.4 Monetary Policy and Economic Outcomes
    6. 14.5 Pitfalls for Monetary Policy
    7. Key Terms
    8. Key Concepts and Summary
    9. Self-Check Questions
    10. Review Questions
    11. Critical Thinking Questions
    12. Problems
  16. 15 Exchange Rates and International Capital Flows
    1. Introduction to Exchange Rates and International Capital Flows
    2. 15.1 How the Foreign Exchange Market Works
    3. 15.2 Demand and Supply Shifts in Foreign Exchange Markets
    4. 15.3 Macroeconomic Effects of Exchange Rates
    5. 15.4 Exchange Rate Policies
    6. Key Terms
    7. Key Concepts and Summary
    8. Self-Check Questions
    9. Review Questions
    10. Critical Thinking Questions
    11. Problems
  17. 16 Government Budgets and Fiscal Policy
    1. Introduction to Government Budgets and Fiscal Policy
    2. 16.1 Government Spending
    3. 16.2 Taxation
    4. 16.3 Federal Deficits and the National Debt
    5. 16.4 Using Fiscal Policy to Fight Recession, Unemployment, and Inflation
    6. 16.5 Automatic Stabilizers
    7. 16.6 Practical Problems with Discretionary Fiscal Policy
    8. 16.7 The Question of a Balanced Budget
    9. Key Terms
    10. Key Concepts and Summary
    11. Self-Check Questions
    12. Review Questions
    13. Critical Thinking Questions
    14. Problems
  18. 17 The Impacts of Government Borrowing
    1. Introduction to the Impacts of Government Borrowing
    2. 17.1 How Government Borrowing Affects Investment and the Trade Balance
    3. 17.2 Fiscal Policy, Investment, and Economic Growth
    4. 17.3 How Government Borrowing Affects Private Saving
    5. 17.4 Fiscal Policy and the Trade Balance
    6. Key Terms
    7. Key Concepts and Summary
    8. Self-Check Questions
    9. Review Questions
    10. Critical Thinking Questions
    11. Problems
  19. 18 Macroeconomic Policy Around the World
    1. Introduction to Macroeconomic Policy around the World
    2. 18.1 The Diversity of Countries and Economies across the World
    3. 18.2 Improving Countries’ Standards of Living
    4. 18.3 Causes of Unemployment around the World
    5. 18.4 Causes of Inflation in Various Countries and Regions
    6. 18.5 Balance of Trade Concerns
    7. Key Terms
    8. Key Concepts and Summary
    9. Self-Check Questions
    10. Review Questions
    11. Critical Thinking Questions
    12. Problems
  20. A | The Use of Mathematics in Principles of Economics
  21. B | Indifference Curves
  22. C | Present Discounted Value
  23. Answer Key
    1. Chapter 1
    2. Chapter 2
    3. Chapter 3
    4. Chapter 4
    5. Chapter 5
    6. Chapter 6
    7. Chapter 7
    8. Chapter 8
    9. Chapter 9
    10. Chapter 10
    11. Chapter 11
    12. Chapter 12
    13. Chapter 13
    14. Chapter 14
    15. Chapter 15
    16. Chapter 16
    17. Chapter 17
    18. Chapter 18
  24. References
  25. Index

By the end of this section, you will be able to:

  • Calculate the labor force participation rate and the unemployment rate
  • Explain hidden unemployment and what it means to be in or out of the labor force
  • Evaluate the collection and interpretation of unemployment data

Newspaper or television reports typically describe unemployment as a percentage or a rate. A recent report might have said, for example, from August 2009 to November 2009, the U.S. unemployment rate rose from 9.7% to 10.0%, but by June 2010, it had fallen to 9.5%. At a glance, the changes between the percentages may seem small. However, remember that the U.S. economy has about 160 million adults (as of the beginning of 2017) who either have jobs or are looking for them. A rise or fall of just 0.1% in the unemployment rate of 160 million potential workers translates into 160,000 people, which is roughly the total population of a city like Syracuse, New York, Brownsville, Texas, or Pasadena, California. Large rises in the unemployment rate mean large numbers of job losses. In November 2009, at the peak of the recession, about 15 million people were out of work. Even with the unemployment rate now at 4.8% as of January 2017, about 7.6 million people who would like to have jobs are out of work.

Link It Up

The Bureau of Labor Statistics tracks and reports all data related to unemployment.

Who’s In or Out of the Labor Force?

Should we count everyone without a job as unemployed? Of course not. For example, we should not count children as unemployed. Surely, we should not count the retired as unemployed. Many full-time college students have only a part-time job, or no job at all, but it seems inappropriate to count them as suffering the pains of unemployment. Some people are not working because they are rearing children, ill, on vacation, or on parental leave.

The point is that we do not just divide the adult population into employed and unemployed. A third group exists: people who do not have a job, and for some reason—retirement, looking after children, taking a voluntary break before a new job—are not interested in having a job, either. It also includes those who do want a job but have quit looking, often due to discouragement due to their inability to find suitable employment. Economists refer to this third group of those who are not working and not looking for work as out of the labor force or not in the labor force.

The U.S. unemployment rate, which is based on a monthly survey carried out by the U.S. Bureau of the Census, asks a series of questions to divide the adult population into employed, unemployed, or not in the labor force. To be classified as unemployed, a person must be without a job, currently available to work, and actively looking for work in the previous four weeks. Thus, a person who does not have a job but who is not currently available to work or has not actively looked for work in the last four weeks is counted as out of the labor force.

Employed: currently working for pay

Unemployed: Out of work and actively looking for a job

Out of the labor force: Out of paid work and not actively looking for a job

Labor force: the number of employed plus the unemployed

Calculating the Unemployment Rate

Figure 7.2 shows the three-way division of the 16-and-over population. In January 2017, about 62.9% of the adult population was "in the labor force"; that is, people are either employed or without a job but looking for work. We can divide those in the labor force into the employed and the unemployed. Table 7.1 shows those values. The unemployment rate is not the percentage of the total adult population without jobs, but rather the percentage of adults who are in the labor force but who do not have jobs:

Unemployment rate=Unemployed peopleTotal labor force × 100Unemployment rate=Unemployed peopleTotal labor force × 100
The pie chart shows that, in 2017, 94,366 thousand people were out of the labor force, 152,081 thousand people were employed, and 7,635 thousand people were unemployed
Figure 7.2 Employed, Unemployed, and Out of the Labor Force Distribution of Adult Population (age 16 and older), January 2017 The total adult, working-age population in January 2017 was 254.1 million. Out of this total population, 152.1 were classified as employed, and 7.6 million were classified as unemployed. The remaining 94.4 were classified as out of the labor force. As you will learn, however, this seemingly simple chart does not tell the whole story.
Total adult population over the age of 16 254.082 million
In the labor force 159.716 million (62.9%)
Employed 152.081 million
Unemployed 7.635 million
Out of the labor force 94.366 million (37.1%)
Table 7.1 U.S. Employment and Unemployment, January 2017 (Source: https://data.bls.gov)

In this example, we can calculate the unemployment rate as 7.635 million unemployed people divided by 159.716 million people in the labor force, which works out to a 4.8% rate of unemployment. The following Work It Out feature will walk you through the steps of this calculation.

Work It Out

Calculating Labor Force Percentages

How do economists arrive at the percentages in and out of the labor force and the unemployment rate? We will use the values in Table 7.1 to illustrate the steps.

To determine the percentage in the labor force:

Step 1. Divide the number of people in the labor force (159.716 million) by the total adult (working-age) population (254.082 million).

Step 2. Multiply by 100 to obtain the percentage.

Percentage in the labor force=159.716254.082=0.6286=62.9%Percentage in the labor force=159.716254.082=0.6286=62.9%

To determine the percentage out of the labor force:

Step 1. Divide the number of people out the labor force (94.366 million) by the total adult (working-age) population (254.082 million).

Step 2. Multiply by 100 to obtain the percentage.

Percentage in the labor force=94.366254.082=0.3714=37.1%Percentage in the labor force=94.366254.082=0.3714=37.1%

To determine the unemployment rate:

Step 1. Divide the number of unemployed people (7.635 million) by the total labor force (157 million).

Step 2. Multiply by 100 to obtain the rate.

Unemployment rate=7.635159.716=0.0478 =4.8%Unemployment rate=7.635159.716=0.0478 =4.8%

Hidden Unemployment

Even with the “out of the labor force” category, there are still some people who are mislabeled in the categorization of employed, unemployed, or out of the labor force. There are some people who have only part time or temporary jobs, and they are looking for full time and permanent employment that are counted as employed, although they are not employed in the way they would like or need to be. Additionally, there are individuals who are underemployed. This includes those who are trained or skilled for one type or level of work but are working in a lower paying job or one that does not utilize their skills. For example, we would consider an individual with a college degree in finance who is working as a sales clerk underemployed. They are, however, also counted in the employed group. All of these individuals fall under the umbrella of the term “hidden unemployment.” Discouraged workers, those who have stopped looking for employment and, hence, are no longer counted in the unemployed also fall into this group

Labor Force Participation Rate

Another important statistic is the labor force participation rate. This is the percentage of adults in an economy who are either employed or who are unemployed and looking for a job. Using the data in Figure 7.2 and Table 7.1, those included in this calculation would be the 159.716 million individuals in the labor force. We calculate the rate by taking the number of people in the labor force, that is, the number employed and the number unemployed, divided by the total adult population and multiplying by 100 to get the percentage. For the data from January 2017, the labor force participation rate is 62.9%. Historically, the civilian labor force participation rate in the United States climbed beginning in the 1960s as women increasingly entered the workforce, and it peaked at just over 67% in late 1999 to early 2000. Since then, the labor force participation rate has steadily declined, slowly to about 66% in 2008, early in the Great Recession, and then more rapidly during and after that recession, reaching its present level, where it has remained stable, near the end of 2013.

The Establishment Payroll Survey

When the unemployment report comes out each month, the Bureau of Labor Statistics (BLS) also reports on the number of jobs created—which comes from the establishment payroll survey. The payroll survey is based on a survey of about 147,000 businesses and government agencies throughout the United States. It generates payroll employment estimates by the following criteria: all employees, average weekly hours worked, and average hourly, weekly, and overtime earnings. One of the criticisms of this survey is that it does not count the self-employed. It also does not make a distinction between new, minimum wage, part time or temporary jobs and full time jobs with “decent” pay.

How Does the U.S. Bureau of Labor Statistics Collect the U.S. Unemployment Data?

The unemployment rate announced by the U.S. Bureau of Labor Statistics on the first Friday of each month for the previous month is based on the Current Population Survey (CPS), which the Bureau has carried out every month since 1940. The Bureau takes great care to make this survey representative of the country as a whole. The country is first divided into 3,137 areas. The U.S. Bureau of the Census then selects 729 of these areas to survey. It divides the 729 areas into districts of about 300 households each, and divides each district into clusters of about four dwelling units. Every month, Census Bureau employees call about 15,000 of the four-household clusters, for a total of 60,000 households. Employees interview households for four consecutive months, then rotate them out of the survey for eight months, and then interview them again for the same four months the following year, before leaving the sample permanently.

Based on this survey, state, industry, urban and rural areas, gender, age, race or ethnicity, and level of education statistics comprise components that contribute to unemployment rates. A wide variety of other information is available, too. For example, how long have people been unemployed? Did they become unemployed because they quit, or were laid off, or their employer went out of business? Is the unemployed person the only wage earner in the family? The Current Population Survey is a treasure trove of information about employment and unemployment. If you are wondering what the difference is between the CPS and EPS, read the following Clear it Up feature.

Clear It Up

What is the difference between CPS and EPS?

The United States Census Bureau conducts the Current Population Survey (CPS), which measures the percentage of the labor force that is unemployed. The Bureau of Labor Statistics' establishment payroll survey (EPS) is a payroll survey that measures the net change in jobs created for the month.

Criticisms of Measuring Unemployment

There are always complications in measuring the number of unemployed. For example, what about people who do not have jobs and would be available to work, but are discouraged by the lack of available jobs in their area and stopped looking? Such people, and their families, may be suffering the pains of unemployment. However, the survey counts them as out of the labor force because they are not actively looking for work. Other people may tell the Census Bureau that they are ready to work and looking for a job but, truly, they are not that eager to work and are not looking very hard at all. They are counted as unemployed, although they might more accurately be classified as out of the labor force. Still other people may have a job, perhaps doing something like yard work, child care, or cleaning houses, but are not reporting the income earned to the tax authorities. They may report being unemployed, when they actually are working.

Although the unemployment rate gets most of the public and media attention, economic researchers at the Bureau of Labor Statistics publish a wide array of surveys and reports that try to measure these kinds of issues and to develop a more nuanced and complete view of the labor market. It is not exactly a hot news flash that economic statistics are imperfect. Even imperfect measures like the unemployment rate, however, can still be quite informative, when interpreted knowledgeably and sensibly.

Link It Up

Click here to learn more about the CPS and to read frequently asked questions about employment and labor.

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