You have seen a business cycle before, and we know that it is normal for the economy to go through periods of growth and contraction.
Along this business cycle, most people are generally concerned about things like the unemployment rate and inflation--two of the most common concerns for consumers.
In this tutorial, we will discuss the unemployment rate.
Now, economists use many different kinds of data to help them determine three different types of indicators:
Calculating employment and unemployment and understanding it is a big part of this.
The Bureau of Labor Statistics publishes the Employment Situation Summary every month.
The first part of this report details the number of jobs created in the economy by sector, breaking it down by either an increase or decrease in non-farm payrolls.
Total non-farm payroll employment edged up in December (+74,000). In 2013, job growth averaged 182,000 per month, about the same as in 2012 (+183,000 per month). In December, job gains occurred in retail trade and wholesale trade, while employment declined in information.
Notice the mention of non-farm payroll, which is the number of individuals employed outside the farming sector. It is important to note that the farming sector is not included in these figures on jobs created or jobs lost.
The unemployment rate is also measured by the Bureau of Labor Statistics.
The number of unemployed persons declined by 490,000 to 10.4 million in December, and the unemployment rate declined by 0.3 percentage point to 6.7 percent.
Unemployment is measured as a percentage rate of the number of individuals that would like to work and are an active part of the labor force, to the number of individuals that comprise the active labor force.
To be unemployed, you need to be:
Because of this definition, the unemployment rate generally discussed in the media does not actually represent the full number of people who are actually unemployed. There is a margin of error, up or down.
So, not in the labor force are people who are either not looking for work because they do not want a job or they have given up looking.
The labor force equals the number of people employed plus the number of people unemployed.
When we calculate the unemployment rate, we take the number of people unemployed and divide by the labor force (not the overall population).
Because it is impossible to know every single person in this situation--because not everyone files for unemployment--the government conducts a monthly sample survey called the Current Population Survey, or CPS.
This survey includes about 60,000 households, or approximately 110,000 individuals, and they try to ensure that it is representative of the entire U.S. population.
Interviewers ask questions about household members' labor force activities, and then people are classified as follows:
This survey process has a margin of error because it relies on statistical estimates of labor force participation rates, the number of people actively seeking a job, and the number of people who are no longer actively looking for a job.
Of those people who are no longer actively looking for a job, some are what we consider marginally attached or marginalized workers, or discouraged workers, referring to people who have completely given up looking, because they think there is no longer any hope of finding a job.
Recall that a lagging indicator describes what has already happened in the economy.
Unemployment is a lagging indicator because businesses respond to an upturn in the economy, or an increase in demand for their good or service. When they see this increase in demand for their good or service, they hire more workers and start producing more.
Firms do the same thing in the opposite situation. They respond to a downturn in the economy. When they see the decrease in demand for their good or service, they lay off workers and produce less.
Therefore, unemployment does move with the business cycle, but it generally lags behind. People get their jobs back only after the economy has begun to recover, which is why we call unemployment a lagging indicator.
Because of the statistical issues in calculating an accurate unemployment rate, it is not a perfect indicator of how our economy is performing; it has its strengths and weaknesses.
The longer a recession lasts, the more this can, in fact, be the case. These are people we refer to as discouraged workers.
There are also many people working part time, who may have had their hours cut. These people are not considered unemployed, yet working 10-15 hours a week is certainly not going to sustain them financially. They would likely want to work a lot more hours.
Therefore, the unemployment rate that is published does not take these things into consideration.
It is important to keep in mind, though, that there is a significant margin of error.
Source: Adapted from Sophia instructor Kate Eskra.
