The unemployment rate reflects the proportion of the country’s workforce who are unemployed even though they are willing and able to work. It is one of the broadest and most commonly used indicators to measure the strength and health of the current economy. In fact, there are several different unemployment rates, depending on the scope and definition of labor. The most widely used rate is the U3 unemployment rate, which can be calculated using the formula below:
Unemployment Rate U3 = (unemployment / labor) x 100
In the following paragraphs, we will take a closer look at each of these components and learn how to calculate the unemployment rate step by step.
1) Identify the Public Labour group
To calculate the unemployment rate, we first need to identify civilian labor. The labor force includes all persons 16 years of age and older who are actively working or seeking employment. In other words, only considers people capable of working. Thus, the labor force does not include retired workers, students, institutionalized people, and people who are unable to find employment anymore due to lack of opportunities. In addition, the civil service also does not include active military personnel.
To illustrate this, imagine a country called Smalland. As the name implies, Smalland is very small and has only 200 inhabitants.
Of the 200 people, 30 are children (i.e., under the age of 16), 10 are full-time students, 15 are active in the military, 25 are retired, 15 are parents living at home, and 5 are currently in prison. These people are not classified as labor force members because they are unable to work. Thus, the Smalland civil service consists of 100 people i.e. (200-30-10-15-25-15-5 = 100).
2) Identify the Number of Unemployed People
Once we know who the labor force is, the next step is to identify the number of unemployed people in the economy. According to the Bureau of Labor Statistics (BLS), people are classified as unemployed if they are not working but are willing and actively looking for work. In other words, the number of unemployed people includes all currently unused civil servants.
In the case of the Smalland country, we know that the labour force consists of 100 people. Now, suppose out of those 100, 95 are employed by private companies and government entities (excluding the armed forces). In that scenario, the remaining 5 citizens are classified as unemployed.
3) Divide Unemployment With Labor Force
With the information gathered above, we can now calculate the unemployment rate. To calculate this, we need to divide the number of unemployed people with civil servants which consists of (unemployed and labour force). This step is important because it converts absolute numbers into relationships, which is necessary to compare the results with other different countries.
For example, we have determined that Smalland has a workforce of 100 people. This includes 5 people who are unemployed. Therefore, the national unemployment rate can be calculated as 0.05 (i.e., 5/100).
4) Multiply the Results by 100
Finally, we can multiply the result by 100 to convert the rate into percentages. This makes it easier to interpret and compare results as most of the unemployment rates you will encounter are reported as in percentages.
In the case of Smalland, the rate we calculate above (0.05) multiplied by 100 equals 5%. Thus, we can say that the country has an unemployment rate of 5%. Or in other words, 5% of everyone in Smalland who is willing and able to work at the moment does not have a job.
The unemployment rate reflects the proportion of the country’s workforce that is unemployed but available and actively looking for work. The U3 unemployment rate can be calculated by:
(1) Identify groups of civil servants
(2) Identify the number of unemployed people
(3) Dividing the unemployment with labor
(4) Multiply the result by 100.