How The U.S. Unemployment Rate Is Calculated, And What It Really Means

Along with the gross domestic product and the inflation rate, the unemployment rate is considered one of the most important economic indicators. As we battle the coronavirus pandemic and a recession, that number is tossed around even more than usual.

The nation’s unemployment rate is one of the two key numbers reported every month by the Department of Labor, said Mark Hamrick, senior economic analyst at Bankrate. Along with the establishment survey, which indicates the number of jobs added or lost in the month, this number is meant to give a snapshot of our economy’s health based on how many people are working, he said.

For instance, the country gained 1.4 million jobs in August, dropping the current unemployment rate to 8.4%. But where does this number come from? And what does it actually mean? Here’s a closer look at the unemployment rate and what it tells us about joblessness in America.

How Is The Unemployment Rate Calculated?

The unemployment rate that most of us hear about is known as U-3. This represents the number of unemployed people as reported by states, divided by the number of people in the workforce, said Jane Oates, a former Labor Department official who now serves as president of the advocacy group WorkingNation. The Bureau of Labor Statistics reports this number on the first Friday of each month. 

However, even though a single unemployment rate is often referenced, there are actually several different numbers in the monthly BLS report related to unemployment. And the U-3 rate includes only workers who are actively looking for jobs.

Because it’s not actually possible to know the employment status of every single citizen, the government has to use a nationally representative survey to arrive at a figure for the whole country. “Each month, the U.S. government surveys a representative sample of households and asks them questions about their employment status,” explained Barbara Biasi, an assistant professor of economics at the Yale School of Management. The survey includes 60,000 randomly selected households and the employment status of those 16 and older.

Questions include whether they are employed, not employed and looking for a job, not employed and not looking, temporarily absent from work, retired, etc. It’s the information collected in this survey that paints a broader ― and more realistic ― picture of what the unemployment rate really is.

What The Unemployment Rate Actually Tells Us

Under ordinary circumstances, the official U-3 unemployment rate is a pretty good indicator of workers’ experience in the labor market, Biasi said. Of course, these are far from ordinary times.

One of the limitations of the unemployment rate in general is that it’s a lagging indicator, meaning it goes up or down according to economic changes that have already occurred in the past few months. It’s based on past data and doesn’t show what’s going on right at this moment or what will happen in the future.

For example, many of the workers who are currently being counted as employed include seasonal workers, such as those hired to conduct the 2020 census. Those employees were hired temporarily, but the current unemployment rate of 8.4% doesn’t reflect the fact that they could be out of work again soon.

Baisi said that U-3, in particular, doesn’t count people who are “discouraged” and have stopped searching for a job. This group is made up of people who believe they don’t have the right qualifications or education, there’s no work available in their field, are too young or old, or discrimination would prevent them from finding work. “These people might end up representing a non-trivial share of the population if the economy is bad for a long period of time,” she said. It also doesn’t count those who are working part time but want (or need) full-time work.

For that information, look at the U-6 unemployment rate. Oates noted that this number more accurately reflects the labor market because it includes people who are working but underemployed, or who are out of work and aren’t looking for a job at all. In August, for example, this rate was above 14% ― nearly double U-3.

Other unemployment rates include:

U-1: Number of people who have been unemployed for 15 weeks or longer.

U-2: Number of people who lost their job or whose temporary job ended.

U-4: Number of unemployed people, plus discouraged workers.

U-5: Number of unemployed people, plus discouraged workers and anyone else who wants a job and looked for one in the past 12 months but gave up actively searching (known as the “marginally attached”).

One thing that unemployment numbers don’t delve into, Hamrick said, is unemployment insurance benefits. 

“Since the pandemic-related downturn began, there has been an increased focus on the separate numbers released every Thursday on new unemployment claims or new applications for unemployment benefits,” he said, noting that these are two much different sets of numbers (applications represent those who have applied for unemployment insurance but may not qualify for it, while claims are actual requests for cash benefits).

The truth is that there’s no way to know exactly how many people are unemployed. The monthly estimates released by the Bureau of Labor Statistics are good for tracking the health of the workforce and larger economy, but the true unemployment rate is likely higher than we think.