The Bernard Baruch College

Bert W. Wasserman Department of Economics & Finance

Economics 1001-CMWA-D
Principles of Microeconomics

Calculating the Unemployment Rate

There are two groups of people that enter into the calculation of the U.S.
unemployment rate: people who are currently employed (we’ll call this group
E) and those who are not currently employed but who are actively looking for
work. We’ll call this second group U BL (unemployed but looking, sort of like a
Facebook status category).
The unemployment percentage rate u is then calculated as:
U BL
u= × 100
E + U BL
that is, the number of people currently unemployed but looking for work divided
by the total number of people either employed or unemployed but looking. For
example, suppose that there are 90 people employed and 10 people unemployed
but looking. Then
10
u= × 100 = 10%.
90 + 10
If now 5 of the U BL people get discouraged and stop looking, U BL goes from
10 down to 5 and
5
u= × 100 = 5.26%.
90 + 5
So the ”unemployment rate” went down (almost by half) but just because some
of the U BL people got discouraged and stopped looking. There were no new
jobs created. So just because u decreases we cannot conclude that there are
more people employed.
Now of course if people previously unemployed get jobs, then u will decline
as well. To see this, let’s go back to the initial numbers; i.e. U BL = 10 and
E = 90 and now suppose that 5 people who were unemployed but looking get
jobs. Then U BL decreases from 10 to 5, but E increases from 90 to 95, so that
5
u= × 100 = 5%.
95 + 5
In this case the unemployment rate decreases as well, but it’s what you might
call a real decrease because it occurred as the result of an increase in the number
of jobs.
So the motto of this tale is that, when the government announces that the
unemployment rate has fallen, you should look into what caused the decrease.
Did u fall because more people found work, or did it decrease because some of
the people who were previously unemployed but looking got discouraged and
stopped actively searching for jobs?