Unemployment Rate Formula and How to Calculate It

Secrets of the Unemployment Rate

Image shows an equation and a woman sitting at a computer sipping tea. First title reads: "How to calculate the unemployment rate: unemployment rate = unemployed/civilian labor force." Second title reads: "Workers who count as 'unemployed': 16 years or older, available to work full-time in the pat 4 weeks, actively looking for work in the past 4 weeks. exception: temporarily laid off worker"

Image by Mary McLain © The Balance 2019

The unemployment rate is the number of unemployed people divided by the total number of people in the civilian labor force. Before you can use the formula, you need to understand the definitions of all these terms.

The Bureau of Labor Statistics has a specific definition of unemployed.

To be counted as unemployed, you must be over 16 and have been available to work full-time during the past four weeks. Most importantly, you must have actively looked for work during that same period. The only exception is if you were temporarily laid off and simply waiting to be called back to a specific job.

The civilian labor force also has a very specific definition. It includes the unemployed plus the employed, no one else.

Now that you understand the terms, the formula is simple: 

Formula

Unemployment Rate = Unemployed / Civilian Labor Force

The BLS designates lots of other sub-groups of people who would like jobs. Some fall into the definition of unemployed and some do not. Make sure you're familiar with these terms so you don't get confused when they're used. They give you the full picture of the labor force in the United States. 

Terms Needed to Calculate the Unemployment Rate

  • Long-term unemployed: If you've been looking for a job for the past four weeks, and you've been without a job for 27 weeks or more.  
  • Marginally attached to the labor force: If you haven't looked for work in the past four weeks, but you have looked sometime in the past year.
  • Discouraged workers: If you've looked for work anytime in the past year, but not in the past four weeks, you're no longer counted as unemployed. But discouraged workers would still like to have a full-time job. They just feel they're too old, don't have the right skills, or will continue to face discrimination.

The BLS calculates several alternative unemployment rates. One is the “real” unemployment rate, which includes the marginally attached and discouraged workers.

The "real" unemployment rate also includes those who are working part-time but would prefer full-time work. Many people say it is the true unemployment rate because it counts everyone who would take a full-time job if it were offered. It’s an effective way of really measuring the slack in the labor force.

Labor Force Participation Rate

The labor force participation rate is similar to the unemployment rate. The only difference is that you take the number of employed and divide it by the civilian population. 

Other Types of Unemployment

You might be interested in the other types of unemployment and how they're calculated. The natural rate of unemployment is healthy for an economy. It includes three components:

  1. Frictional unemployment accounts for voluntary job turnover, such as when people quit a job they don't like to get a better one.
  2. Structural unemployment occurs when job skills no longer match any new jobs. That's usually caused by, and also leads to, long-term unemployment.
  3. Classical unemployment is caused by wage and price controls, minimum wage laws, and unions.

Cyclical unemployment is the type the media talks about the most. It rises dramatically during the contraction phase of the business cycle. By the time it takes off, a recession has already started. That's because unemployment is a lagging indicator. Companies wait until they're sure demand won't come back before laying off their workers. 

How to Use the Unemployment Rate Calculations

The U.S. unemployment rate by year shows the rate in December of each year. It gives a broad-brush review of how bad unemployment was. It reveals that unemployment exceeded 10% twice. It was between 14% and 24.8% during the Great Depression. It was greater than double-digits between 1931 and 1940. The only other year that ended above 10% was 1982, when it was 10.8%.

Current unemployment statistics reveal that the rate was 11.1% in June 2020. The Federal Reserve forecasts it could rise as high as 30% due to the COVID-19 coronavirus pandemic.

The chart below tracks the annual unemployment rate from 1929 to 2020.

The unemployment rate has improved since the Depression. One reason is that the government knows more about preventing it. Research reveals the most cost-effective unemployment solutions are jobs programs.

These programs create more jobs than tax cuts. Also, extended unemployment benefits are the best way to boost the economy. The unemployed are most likely to spend those benefits on day-to-day needs. They put each dollar back into the economy, boosting growth.

Another use for the unemployment rate is to calculate the misery index. It is the combination of the unemployment rate and inflation. 

Article Sources

  1. Bureau of Labor Statistics. “How the Government Measures Unemployment,” Accessed April 4, 2020.

  2. Bureau of Labor Statistics. “Unemployed 27 Weeks or Longer as a Percent of Total Unemployed,” Accessed April 4, 2020.

  3. Brookings. “Long-Term Unemployment: Anatomy of the Scourge,” Accessed April 4, 2020.

  4. Bureau of Labor Statistics. “Labor Force Characteristics,” Accessed April 4, 2020.

  5. Bureau of Labor Statistics. “Glossary,” Accessed April 4, 2020.

  6. Bureau of Labor Statistics. “Table A-15. Alternative Measures of Labor Underutilization.” Accessed April 4, 2020.

  7. CFI. “What Is NAIRU?” Accessed April 4, 2020.

  8. OECD. “Structural Unemployment.” Accessed April 4, 2020.

  9. Merriam-Webster. “Lagging Indicator,” Accessed April 4, 2020.

  10. CFI. “What Is Cyclical Unemployment?” Accessed April 4, 2020.

  11. Bureau of Labor Statistics. “Labor Force, Employment, and Unemployment, 1929-39: Estimating Methods,” Page 51. Accessed April 4, 2020.

  12. Bureau of Labor Statistics. "Top Picks," Select “Unemployment Rate,” Retrieve Data, ”Select 1948-2020,” Select “Go.” Accessed April 4, 2020.

  13. Bureau of Labor Statistics. “Labor Force Statistics from the Current Population Survey.” Accessed July 2, 2020.

  14. Federal Reserve Bank of St. Louis. “Expected U.S. Macroeconomic Performance During the Pandemic Adjustment Period,” Accessed April 4, 2020.

  15. University of Massachusetts, Amherst. “The U.S. Employment Effects of Military and Domestic Spending Priorities,” Table 1, Column 3. Accessed April 4, 2020.

  16. Merriam-Webster. “Misery Index,” Accessed April 4, 2020.