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How is the Unemployment Rate Determined? Read This to Find Out

How is the Unemployment Rate Determined?
Data about unemployment collected by the government is useful for making the necessary provisions to create jobs, and thereby improve the standard of living. Here is more on how the unemployment rate is determined.
Shashank Nakate
Last Updated: Apr 9, 2018
Work Projects Administration
In the United States of America, the Current Population Survey (CPS) is conducted every month since 1940. The survey, conducted to gather employment-related data, was earlier known as Work Projects Administration (WPA).
Determining the unemployment rate helps understand the economic condition of a nation. Unemployment rate is directly associated with the purchasing power of the people, and thereby, the economy of the country. The term unemployment rate can be simply described as the percentage of people who are in need of a job. However, the procedure to calculate the unemployment rate is not that simple. Different parameters and factors are taken into account while determining this rate in a community or country.

The workforce of a country or community is categorized as employed, unemployed, and not in labor force. Data collected on the basis of such categorization helps in determining the unemployment rate. The Bureau of Labor Statistics (BLS) does the work of collecting data associated with employment. The data on employment status is gathered through Current Population Survey (CPS). The unemployed are the ones who don't have a job, and seek employment.
Determining the Unemployment Rate
Before understanding how the government calculates the unemployment rate, it is necessary to know a bit about the Bureau of Labor Statistics (BLS) and Current Population Survey (CPS).
Bureau of Labor Statistics (BLS)
Data analysis team of labor statistics
The Bureau of Labor Statistics is the principle fact-finding agency of the US Government, which collects, processes, and analyzes data related to labor economics. The data is disseminated to the American public, Federal agencies, US Government, US Congress, state governments, etc.
Current Population Survey (CPS)
Employment and unemployment survey
This statistical survey provides a monthly report on the employment situation in the country. The survey is conducted by United States Census Bureau for the Bureau of Labor Statistics. The number of employed and unemployed individuals is obtained through this survey.
The Bureau of Labor Statistics collects data related to unemployment by contacting 60,000 households that are selected scientifically. The data for roughly 110,000 individuals is collected through the Current Population Survey (CPS). The number of unemployed persons and population of the labor force are the figures that are important from the point of calculating the unemployment rate. Here, the total population of the community or country becomes irrelevant. Let us now understand how the unemployment rate is determined.
How the Government Calculates the Unemployment Rate
Unemployment Rate = (Number of Unemployed ÷ Labor Force) × 100
Definition of Employed and Unemployed
Employed and unemployed concept
A person who has got a job is considered employed. He or she is considered employed in the following cases - he must either have a full-time job, part-time job, must be self-employed, or be involved in a family business. In the case of a person working in a family business, he is considered as employed irrespective of whether he gets paid or not.

An unemployed individual is one who doesn't have a job and is looking for one. Those who are neither employed nor looking for a job cannot be considered to be a part of the labor force.
Why is it Calculated?
Unemployment has a negative effect on a country's economy and the morale of its people. It is not just the unemployed person, but also his family, and in turn the country, that is affected. This is the reason why calculating the unemployment rate is very important.
Limitations of This Calculation
No system or formula of calculating the unemployment rate can be entirely foolproof. Similarly, the formula used for calculating the unemployment rate doesn't provide us with a clear understanding or figure of the actual scene.
  • In the given formula, the unemployment rate is basically the percentage of the labor force. However, there are people out there who need a job, but have given up on searching for one due to varied reasons. Therefore, it is difficult to find the exact number of unemployed in a given community or country.
  • Another limitation of the method is that it is difficult to differentiate between full-time and part-time jobs.
  • Sometimes, people have to do a job for which they are overqualified. This happens when they are unable to find a suitable job. Unemployment rate calculations don't reflect the number of such individuals, who seek a better job.
The information on unemployment rate provides the government with some useful details on the employment status of its citizens. The details prove to be of help to the government to take necessary steps for the welfare of its people.