Buzz
It’s hard to definitively determine if we are officially in a recession, but unemployment rates have long been one of the most dependable indicators to assess the health of the economy. However, the statistics frequently presented in the media do not fully capture the whole picture. In fact, the Bureau of Labor Statistics (BLS) calculates the unemployment rate in six distinct ways. Here’s what you should understand about the real unemployment rate, and why it could provide a more precise gauge of the labor market’s condition.
What are the various methods of calculating the unemployment rate?
To start with, let’s define some terms: The BLS defines “unemployment” as being “jobless, actively looking for work, and available to accept a job.” From this definition, the official unemployment rate is the proportion of unemployed individuals in relation to the labor force (the total of both employed and unemployed people). In simpler terms, the unemployment rate shown in the media represents the percentage of individuals without a job who could work if they wanted to.
As mentioned earlier, the BLS calculates six different unemployment rates. The most frequently referenced (and reported) is the U-3 rate. However, the most detailed statistic provided is the U-6, also known as the true unemployment rate.
Why the true unemployment rate provides a fuller picture
The commonly referenced, “official” unemployment rate (U-3) only accounts for individuals who have actively sought employment within the past four weeks. The true unemployment rate (U-6) adopts a more inclusive definition of unemployment, one that may offer a clearer representation of the labor market’s condition. Significantly, the U-6 calculation includes underemployed, marginally attached, and discouraged workers.
As Politico explained, a significant portion of the U.S. labor force is “functionally unemployed”; meaning individuals who are actively searching for work but are unable to secure a full-time job, part-time workers earning below the poverty level, or those who fall into a broader definition of unemployment not captured by the official U-3 rate.
The Balance offers a perspective on this using data from the early days of the pandemic: In April 2020, the official unemployment rate peaked at 14.8 percent. The true unemployment rate—taking into account the “functionally unemployed” described earlier—was 22.9 percent. This higher figure might provide a more accurate reflection of the labor market’s struggles at the start of the pandemic.
In July 2022, the unemployment rate stood at %, but the real rate, which includes those not actively seeking work, was much higher at 6.7% (according to the BLS). For those interested, the BLS has tracked the unemployment rate annually since 1929.
Understanding how to calculate the real unemployment rate
To simplify how the BLS determines the real unemployment rate, The Balance breaks it down into three steps:
First, combine the officially unemployed with marginally attached workers and those working part-time for economic reasons. This gives a broader picture of the underemployed population.
Next, combine those actively in the labor force with the number of marginally attached workers.
Finally, divide the total number of underemployed (from step 1) by the total labor force (from step 2).
Although the BLS calculates the real unemployment rate, if you're interested in verifying their results, you'll want to familiarize yourself with their data-finder tool.
The key takeaway
Unemployment is just one of many factors used to evaluate the economy's health, yet it remains one of the most revealing indicators available to the public. While there’s an ‘official’ unemployment rate widely reported in the media, it's crucial to broaden the definition of who is considered unemployed or underemployed. By examining alternative calculations, particularly the real unemployment rate, we gain a clearer picture of how the nation's workforce is truly performing.
