How is the unemployment rate calculated in the United States, specifically by the Bureau of Labor Statistics (BLS)? I’m interested in the exact methodology, including: what criteria someone must meet to be considered employed, unemployed, or not in the labor force; how the data is collected (e.g., surveys, administrative records, etc.); the specific survey or data sources used; how the raw data is processed and adjusted (e.g., seasonal adjustments); and what the possible sources of error or bias are in the calculation? Furthermore, how does the official U-3 unemployment rate relate to other alternative measures of labor underutilization, such as the U-6 rate, and what do these alternative measures capture that the U-3 rate might miss? Are there specific demographic groups or industries where the unemployment rate calculation might be less accurate or reliable, and if so, why?

Answer

The unemployment rate in the United States is calculated by the Bureau of Labor Statistics (BLS), a part of the Department of Labor. It is released monthly, usually on the first Friday of the following month, as part of the Employment Situation Summary (also known as the jobs report). The calculation is based on data collected through two major surveys: the Current Population Survey (CPS) and the Current Employment Statistics (CES) survey.

Current Population Survey (CPS)

The CPS is a monthly survey of about 60,000 households conducted by the Census Bureau for the BLS. It is the primary source of information for the unemployment rate. The CPS categorizes individuals aged 16 and older into three groups:

  • Employed: Individuals who did any work for pay or profit during the reference week (the week including the 12th of the month), or who worked 15 hours or more as unpaid workers in a family business or farm. Also included are those who were temporarily absent from their jobs because of illness, vacation, labor disputes, or other reasons.

  • Unemployed: Individuals who were not employed during the reference week, were available for work, and had actively looked for work at some time during the prior 4 weeks. Actively looking for work may include contacting an employer directly, sending out resumes or filling out applications, using employment agencies, or placing or answering advertisements. Those who were waiting to be recalled to a job from which they had been temporarily laid off are also classified as unemployed.

  • Not in the Labor Force: All other individuals who are neither employed nor unemployed. This includes students, retirees, homemakers, disabled persons who cannot work, and those who are not looking for work.

Labor Force: The labor force is the sum of the employed and the unemployed.

Unemployment Rate Calculation:

The unemployment rate is calculated as the percentage of the labor force that is unemployed:

Unemployment Rate = (Number of Unemployed / Labor Force) * 100

Key Definitions and Concepts:

  • Labor Force Participation Rate: This is the percentage of the civilian noninstitutional population that is in the labor force. It is calculated as: (Labor Force / Civilian Noninstitutional Population) * 100

  • Civilian Noninstitutional Population: This includes people aged 16 and older residing in the 50 states and the District of Columbia who are not inmates of institutions (e.g., penal and mental facilities, homes for the aged), and who are not on active duty in the Armed Forces.

  • Discouraged Workers: These are people who are not currently looking for work because they believe no jobs are available for them. They are not counted as unemployed but are tracked by the BLS.

  • Marginally Attached Workers: These are people who are neither employed nor unemployed, but want and are available for work, and have looked for a job sometime in the prior 12 months. Discouraged workers are a subset of marginally attached workers.

Alternative Measures of Unemployment (U-1 to U-6):

The BLS publishes six alternative measures of labor underutilization, ranging from U-1 to U-6. These measures provide a more comprehensive view of the labor market than the standard unemployment rate (U-3).

  • U-1: Percentage of labor force unemployed 15 weeks or more.

  • U-2: Percentage of labor force who lost their job or completed temporary work.

  • U-3: Official unemployment rate.

  • U-4: U-3 + Percentage of discouraged workers to the labor force.

  • U-5: U-4 + Percentage of all other marginally attached workers to the labor force.

  • U-6: U-5 + Percentage of those employed part-time for economic reasons to the labor force. "Part-time for economic reasons" refers to those who want and are available for full-time work but have had to settle for part-time schedules.

Current Employment Statistics (CES) Survey:

While the CPS is used to calculate the unemployment rate, the CES survey (also known as the payroll survey) provides data on employment, hours, and earnings from a sample of about 144,000 businesses and government agencies, representing approximately 697,000 individual worksites. This survey is used to estimate the net change in jobs each month. It does not count the self-employed.

Data Analysis and Seasonal Adjustment:

The BLS uses statistical techniques to analyze the data collected from the CPS and CES surveys. This includes seasonal adjustment to remove the effects of normal seasonal variations in employment (e.g., hiring for the holiday season). The data are also weighted to reflect the population.

Significance of the Unemployment Rate:

The unemployment rate is a key economic indicator. It reflects the health of the labor market and the overall economy. A high unemployment rate can indicate a weak economy, while a low unemployment rate can indicate a strong economy. However, other factors, such as inflation and economic growth, must also be considered to get a complete picture of the economic situation. The Federal Reserve also considers the unemployment rate when making decisions about monetary policy.