When someone loses a job, a family is affected. When many people lose their jobs, eventually the whole nation is affected. Workers lose income, while the country loses production and consumer spending.
With such a strong impact, the unemployment rate is a key way to measure the state of the economy.
So how is unemployment actually measured? Is everyone who is out of work counted? What are the so called "shadow unemployed"? CNBC explains.
What is the definition of unemployment?
As defined by the U.S. Bureau of Labor Statistics(BLS), unemployment is when someone does not have a job, has actively looked for work in the past four weeks, and is currently available for work. Also counted as unemployed are people who are temporarily laid off and waiting to be called back to that job.
How is unemployment measured?
Every month, the BLS releases a report on the gains or declines of unemployment from the previous month. The bureau does not use the number of persons filing claims for unemployment insurance (UI) benefits under state or federal programs. Why? Because some people are still jobless when their benefits run out, and many more are not eligible at all or never apply for benefits.
So, the BLS measures unemployment through monthly household surveys, called the Current Population Survey (CPS).
Not every household in the country can be counted, so the survey is meant to be representative of the U.S. population. The bureau says about 60,000 households in specific geographic areas are used for this survey, which translates into approximately 110,000 individuals.
Some 2,200 trained Census Bureau employees interview people in the sample households for information on whether they have jobs or are seeking one. Every month, one-fourth of the households in the sample are changed, so that no household is interviewed more than four-consecutive months.
The surveys have been conducted every month since 1940. They were started as part of the government's response to the Great Depression, when millions in the U.S. and around the globe became unemployed.
The BLS unemployment statistics are based on people who are 16 years old and over. Excluded, however, are people of any age in an institution like a prison, nursing home or mental health center. People on active duty in the Armed Forces are also excluded.
To come up with an unemployment rate, the BLS takes the number of unemployed workers it has found and divides that by the total civilian labor force. The rate is released in the first week of every month and widely reported by news organizations.
The unemployment rate has obvious limitations. It can't differentiate between full-time and part-time jobs. It doesn't account for people who are underemployed, or working in jobs for which they are overqualified because they can't find a good job. It won't tell you how many people have become so discouraged in their job search that they have given up hope of finding a job. (See shadow unemployment below).
Why is the unemployment rate so important?
It's one of the clearest indicators of which way the economy is moving. Rising unemployment is seen as a sign of a weak economy, with slow growth and little spending. That might cause action by the Federal Reserve, which has a mandate to help reduce unemployment, like increasing the nation's money supply, also known as Quantitative Easing, in order to boost the economy.
On the other hand, if employment is rising and the economy is growing, that could cause fears of inflation and the Fed—with a mandate to control inflation—could raise interest rates to slow down an overheating economy.
Do states and cities conduct their own jobless rate surveys?
Yes. In addition to calculating the national rate, the BLS partners with states and cities to collect information for unemployment rates that are released each month. There are some 7,300 areas where this information is collected, including cities with populations of at least 25,000, all the states, and some selected counties.
Who is considered employed?
Anyone is considered employed if the person did any work at all for pay or profit during the time the BLS collects data. This includes all part-time and temporary work, as well as regular full-time, year-round employment. People are also counted as employed if they have a job at which they did not work, whether they were paid or not, because they were:
- On vacation
- Experiencing child-care problems
- Taking care of some other family or personal obligation
- On maternity or paternity leave
- Involved in an industrial dispute
- Prevented from working by bad weather
What is shadow unemployment?
This term describes people who have no job, have stopped looking for one and are considered out of the labor force by the BLS. As such, they are not added to official unemployment statistics.
Many who are not in the labor force are going to school or are retired, but would rather have full-time jobs. Family responsibilities keep others out of work as well. As a result, many people stop looking for work because they can't find a job. They are what's known as the "shadow unemployed," and if counted, would increase the number of those out of work.
How do the seasons affect the jobless rate?
Total employment and unemployment are higher in some parts of the year than in others. For example, unemployment is higher in January and February, when it is cold in many parts of the country and as a result work in agriculture, construction and other seasonal industries is curtailed.
In June, both employment and unemployment rise, when students enter the labor force in search of summer jobs.
Who can and cannot collect unemployment insurance?
To get benefits, a person must have worked at least 680 hours in the past year and must have lost a job through no fault of his or her own. To remain eligible each week, the person must be physically able to work, available for work and actively seeking work.
People who own businesses or are members of limited partnerships or limited liability companies are not eligible for unemployment benefits.
Unemployment benefits are calculated on someone's earnings. Each state has its own rules regarding the maximum and minimum weekly payout, but the range of weekly benefit payments is usually $130 to $590. To calculate the benefit amount:
- Add the total wages for the two highest quarters in the past year.
- Divide the total by two.
- Multiply by 0.0385.
Generally, the unemployed are eligible to receive up to 26 weeks of benefits. If those are used up, a federal program kicks in extending the benefits up to 33 more weeks, and up to 99 weeks in some states, for those who qualify.
Unemployment benefits come from taxes collected from workers and businesses. Jobless benefits were first started in the U.S. in Wisconsin in 1932, but became national as part of the Social Security Act of 1935.