Who Counts as Unemployed? Labor Force and Unemployment Rate Explained

A person counts as unemployed only if they have no job, are available to work, and have actively looked for work in the past four weeks. To calculate the unemployment rate, divide the number of unemployed people by the labor force and multiply by 100, where the labor force is everyone employed plus everyone unemployed. The unemployment rate calculator runs that division for you. People who are not working and not looking, such as most retirees, full-time students and discouraged workers, are outside the labor force and do not appear in the formula at all.

The arithmetic is one division. The harder part is putting each person in the right group, so this guide spends most of its time on classification, then works full examples, including the one that surprises students: how discouraged workers can make the unemployment rate fall.

The three groups every adult falls into

The measurement starts with the civilian noninstitutional population aged 16 and older. That excludes children under 16, people on active military duty, and people living in institutions such as prisons and nursing homes. Everyone left belongs to exactly one of three groups:

1. Employed: did any work for pay or profit during the survey week. Part-time work counts. One shift a week makes you employed.

2. Unemployed: had no job, was available to work, and actively searched in the past four weeks (for example, by applying to employers or contacting an employment agency).

3. Not in the labor force: neither employed nor unemployed. This includes retirees, full-time students who are not looking for work, stay-at-home parents who are not looking, and discouraged workers.

The labor force is groups 1 and 2 added together.

In the United States, the Bureau of Labor Statistics estimates these groups from a monthly household survey called the Current Population Survey, which is why the definitions are written in terms of what a person did during a specific week.

The formulas

• Labor force = Employed + Unemployed
• Unemployment rate = (Unemployed / Labor force) x 100
• Labor force participation rate = (Labor force / Adult civilian noninstitutional population) x 100
• Employment-population ratio = (Employed / Adult civilian noninstitutional population) x 100

The unemployment rate uses the labor force as its denominator. The participation rate and the employment-population ratio use the whole adult population. Mixing up those denominators is an easy way to get the right method and the wrong number. The unemployment rate vs labor force participation rate comparison lays out the difference in one table.

Who counts as what: a classification table

Two rows trip students up most. The discouraged engineer wants a job but is not counted as unemployed, because she has stopped searching. The part-time cashier is underemployed but counted as fully employed. The discouraged workers vs underemployment comparison covers both groups in more detail.

Worked example: a full calculation

The numbers below describe a hypothetical economy.

1. Labor force = 152 + 8 = 160 million.

2. Unemployment rate = 8 / 160 x 100 = 5 percent.

3. Labor force participation rate = 160 / 250 x 100 = 64 percent.

4. Not in the labor force = 250 minus 160 = 90 million.

5. Employment-population ratio = 152 / 250 x 100 = 60.8 percent.

Check the pieces add up: 152 employed + 8 unemployed + 90 not in the labor force = 250, the whole adult population. If your groups do not sum to the population, something has been placed in two groups or left out. Rerun the numbers on the unemployment rate calculator and the labor force participation rate calculator.

Why discouraged workers lower the measured rate

Start from the economy above (unemployment rate 5 percent) and suppose 2 million unemployed people stop searching because they believe no jobs are available. Nobody found work. They simply moved from "unemployed" to "not in the labor force."

• Employed: still 152 million.
• Unemployed: 8 minus 2 = 6 million.
• Labor force: 152 + 6 = 158 million.
• Unemployment rate: 6 / 158 x 100 = about 3.8 percent.
• Participation rate: 158 / 250 x 100 = 63.2 percent.

The unemployment rate fell by more than a full percentage point, and not one extra person has a job. Both the numerator and the denominator shrank by 2 million, but the numerator is far smaller, so it falls by a much larger share. The tell is the participation rate, which dropped from 64 to 63.2 percent.

Compare that with good news. Suppose instead that those 2 million unemployed people find jobs:

• Employed: 152 + 2 = 154 million.
• Unemployed: 6 million.
• Labor force: still 160 million.
• Unemployment rate: 6 / 160 x 100 = 3.75 percent.
• Participation rate: still 64 percent.

The two unemployment rates are almost the same (3.8 and 3.75 percent), but the stories behind them are opposite. This is why economists read the unemployment rate together with the participation rate and the employment-population ratio. The employment-population ratio calculator shows the difference directly: it stays at 60.8 percent when workers give up and rises to 61.6 percent when they find jobs.

When good news raises the unemployment rate

The effect can also run the other way. Suppose the job market improves and 2 million people who were not in the labor force (recent graduates, parents returning to work) start searching. Until they are hired, they are unemployed.

• Unemployed: 8 + 2 = 10 million.
• Labor force: 160 + 2 = 162 million.
• Unemployment rate: 10 / 162 x 100 = about 6.2 percent.

The unemployment rate rose from 5 percent even though nobody lost a job. Early in a recovery, this is one reason the rate can stay high while hiring picks up.

From the unemployment rate to the types of unemployment

Once you have the rate, the next question is usually what kind of unemployment it represents. Frictional and structural unemployment together make up the natural rate, and anything above the natural rate is cyclical unemployment. With a natural rate of 4.5 percent and an actual rate of 6.2 percent, cyclical unemployment is 6.2 minus 4.5 = 1.7 percentage points. The cyclical unemployment calculator does this subtraction, and the types of unemployment guide explains each category. To connect a rise in cyclical unemployment to lost output, see Okun's law explained.

How it shows up on the AP exam

The unemployment rate is part of AP Macro Topic 2.3 (the unemployment topic page has a summary). Questions on it tend to ask you to:

• Calculate the unemployment rate, labor force, or participation rate from a table of population figures.
• Classify a described person as employed, unemployed, or not in the labor force.
• Predict what happens to the measured unemployment rate when people become discouraged, find jobs, or start searching.
• Explain why the official rate can understate weakness in the labor market.

Common mistakes:

• Dividing by the population. The unemployment rate divides by the labor force, not the adult population.
• Counting discouraged workers as unemployed. Without an active search in the past four weeks, they are not in the labor force.
• Counting part-time workers as unemployed. Any paid work makes a person employed, even if they want more hours.
• Assuming a lower rate always means more jobs. Check whether employment rose or the labor force shrank.
• Subtracting rates wrong. Cyclical unemployment is the actual rate minus the natural rate, measured in percentage points.

Summary

Sort every adult into employed, unemployed, or not in the labor force. Add the first two to get the labor force. Divide the unemployed by the labor force for the unemployment rate, and divide the labor force by the adult population for the participation rate. Then ask why the numbers moved, because a falling unemployment rate can mean people found work or that they gave up looking, and only the other measures can tell you which.