This is a step-by-step guide on how to calculate Unemployment Rate with detailed analysis, example, and interpretation. You will learn how to use its formula to evaluate an unemployment rate of a country.
What is Unemployment Rate?
Unemployment rate is a measure used to determine the number of people who are unemployed but available and looking for jobs.
For a person to be counted as part of the unemployed force, that person must have been looking for a job such as contacting prospective employers, sending application letters, registering with government employment agencies and participating in job interviews during the past four weeks.
Young people who are full-time students, mostly between the age of 15 and 24, are not working nor looking for jobs. Therefore, they are not considered part of the unemployed.
To define unemployment rate, the International Labor Organization (ILO) provides these guidelines:
- (a) the unemployed includes all persons above a certain age
- (b) who are available for paid or self-employment
- (c) actively seeking work by taking definite steps to get a paid employment
Based on the above definition of the unemployment rate, which includes only unemployed but available people who are actively looking for jobs, the unemployment rate could be lower than the actual unemployment rate or actual number of people out of work.
Individuals who are discouraged and no longer seeking work are not counted as part of the unemployed.
Persons working full-time at home taking care of their children are similarly not included in determining the number of the unemployed workforce.
How Unemployment Rate Is Calculated?
To correctly establish a country’ unemployment rate, the total number of unemployed and total number of labor force must be accurately determined.
In the United States this duty falls on the Bureau of Labor Statistics (BLS).
The BLS conducts monthly surveys among 60,000 households by using a series of questions aimed at knowing the employment, unemployment and total labor force status per household.
Based on the data gathered from this Current Population Surveys (CPS), an estimate of the country’s unemployment, employment and total labor force is made.
There are other ways of measuring unemployment in the US.
Among these are:
- Social Insurance data showing the number of people availing of unemployment benefits and other welfare programs.
- Sample surveys of the labor force.
- Statistics from government employment offices on the number of people reaching out to them looking for jobs.
The BLS collects all these data from different sources to arrive at a fairly comprehensive picture of the nation’s labor market.
The BLS observes six different measures, tagged as U1 to U6, to give it a more accurate and broader data to base its calculations, as follows:
- U1 – Percentage of labor force unemployed for at least 15 weeks.
- U2 – Percentage of labor force who finished work or lost employment.
- U3 – Official unemployment rate as defined by the ILO.
- U4 – Discouraged workers.
- U5 – Marginally or loosely attached workers or those who are able and would like to work but have not actually sought employment.
- U6 – Part-time workers looking for full-time work but are unable for economic reasons.
Unemployment Rate Formula
Remember that the unemployment rate represents the percentage of the labor force that is considered unemployed based on a set definition.
If you are interested in knowing how to calculate employment rate, you can use a fairly straightforward unemployment rate formula.
In mathematical terms, the unemployment equation is stated as follows:
(On this formula, the total labor force represents the total number of employed and unemployed people)
Unemployment Rate Calculator
Example #1 - How To Calculate Unemployment Rate
The total number of people who were recorded to be gainfully employed in January 2016 is 100,000 while the number of unemployed people was 8,000.
Using the unemployment formula provided above, we will arrive at the following equation:
In this example, the unemployment rate is 7.41%. This represents the percentage of people who are not working or seeking for jobs.
Example #2 - How to Find Unemployment Rate
Now let's take a look at another example which is a bit more complicated, so you can understand clearly how the unemployment rate is calculated.
The following are the labor force data from Country X:
- Total Labor Force 1,500,000
- Employed Individuals 1,350,000
- Discourage Employees 20,000
- Volunteers 6,000
- Question: Compute this country’s unemployment rate.
To find Country X’s unemployment rate, we must first determine the number of unemployed people.
To do so, we have to subtract from the total labor force the employed persons and eliminate groups that do not qualify as unemployed based on the definition given above.
Using these figures and the unemployment rate formula, we can now calculate the unemployment rate of Country X as follows:
In this example, the unemployment rate is quite high. The calculated figure shows that over 8% of people in Country X are current unemployed.