Investor Facts: What Is Unemployment?

Posted on May 19, 2020 at 1:09 PM PDT by

One of the regular data points that makes financial news headlines is the unemployment rate, that is, how many people lack jobs in the economy. But what is unemployment exactly? Well, since this is statistics, a lot depends on how you look at it.

The unemployment number you likely hear is expressed as a percentage, normally in the single digits. Until recently, that number was about 3%, give or take. Of course, with the COVID crisis and associated shutdowns the unemployment rate has mushroomed virtually overnight.

But take a step back. What does 3% or 5% or 15% unemployment mean?

First of all, for many years economists agreed that getting to zero unemployment was hard to imagine. There is always some number of people who could be working but aren’t. Generally, the consensus was that any number at or near 5% should be considered virtually zero, or “full employment.”

Up until the pandemic struck, the U.S. economy was near 3% unemployment, a fact which had many economists wondering if their previous assumption was still true. In the modern era we saw similarly low numbers in the early 1950s (2.5%) and late 1960s (3.5%) but generally speaking the lows have long been close to the 5% range and the highs around 10%.

Getting to the number

The data is gathered by the U.S. Census Bureau as part of its ongoing monthly Current Population Survey (CPS) and reported by the Bureau of Labor Statistics. This is not the decennial census we all know but constant household questionnaires conducted by the government in order to inform investors, businesses and government itself.

The survey looks at the size of the labor force, employment, unemployment, persons not in the labor force, hours of work, earnings, and other demographic and labor force characteristics. One key data point is the labor force participation rate.

That’s how many able-bodied people of working age are in fact working or trying to work but unemployed. This figure has averaged just under 63% since 1948.  So right away we know that a big percentage of Americans are not working but also not counted as “unemployed” because they don’t work by choice or for other reasons.

The all-time high for the participate rate was 67.39 in January 2000 and the low was 58.10 percent in December 1954.

So the Census folks ask tens of thousands of people to fill out forms each month and among the data they gather is information on who is working and who is looking for work but not working. People who are not looking for work are not counted.

The unemployment rate is therefore the mathematical relationship of the first group, the employed, to the second, those who want work and don’t have it. The result is the unemployment rate commonly cited.

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