Wednesday, September 4, 2019

The Official Definition of Unemployment

Unemployment statistics are among the most closely watched and most widely reported labor market numbers. These figures provide insight into the degree to which available labor resources are being utilized in the economy.

The official definition of unemployment used by the Bureau of Labor Statistics (BLS) is all persons within the civilian noninstitutional population (CNP) who do not have a job, but are currently available for work and are actively searching for work. The CNP consists of all persons age 16 years and over, excluding those on active duty in the U.S. Armed Forces and the institutional population (e.g., prison inmates or those in homes for the aged).

Unemployment is sometimes thought to include only those individuals who both qualify for and are receiving unemployment insurance benefits. However, many outside this group are considered to be unemployed based on the official definition used by BLS. Examples include those who have exhausted unemployment benefits, new labor market entrants – including recent high school and college graduates – and those who are not covered by unemployment insurance, such as the formerly self-employed. These groups are considered unemployed as long as they are actively seeking work.

The official definition of unemployment also excludes certain groups who are sometimes thought of as being unemployed or “underemployed.” Those who would like to work and have actively searched for work sometime in the last 12 months – so-called marginally attached and discouraged workers – are not counted in the official definition because they are not currently seeking work. People working part time who would prefer full-time work are also not counted as unemployed because they are working – albeit fewer hours than they would like. Finally, those who are not employed (i.e., did work for pay or profit) and do not fit the above definition of unemployed are classified as “not in the labor force.”

Given the definition of unemployment, what is the unemployment rate? It is, simply put, the percentage of the civilian labor force that is unemployed. The civilian labor force is the sum of those in the CNP that are either employed or unemployed. Mathematically, the official unemployment rate is defined as:

Unemployment Rate = (unemployed)/(employed + unemployed) *100
= (unemployed)/(civilian labor force)*100

Often, critics suggest that the official unemployment rate understates true unemployment. In fact, since the official rate was first computed in 1940, only minor changes have been made to the definition of unemployment despite numerous outside reviews. The official measure has withstood the test of time largely because of its objectivity.

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