Unemployment Rate Calculation: Sub-Sets

The definition of unemployment provided us with some insight as to how the statistics are different than what an uninformed person would expect them to be. In this article, we will have a step by step look at how the unemployment rate for any country is calculated. Every country has its own mechanism of calculating the unemployment rate. However, these mechanisms are very similar to each other and have their roots in very same method described below.

The Denominator

We know that the unemployment rate is a ratio. This means that it is nothing but a numerator divided by the denominator. The numerator is the number of unemployed people. However, what is used as the denominator can have a huge impact on the unemployment rate. The government does not use the entire population in the denominator. Instead, it uses a sub set of the entire population in the denominator. It is for this reason that we need to have a good look at the subsets.

Complete Population

This is the entire population of any country. It includes every citizen i.e. right from a newborn baby to a very old person. For obvious reasons, this is not an appropriate number to base the calculation of unemployment rate upon. If this number was used as the denominator, then the government would be held accountable as to why babies, old people and sick people are not being employed! That would be a bizarre situation.

Not Eligible to Work

Hence, to get rid of the above mentioned issue, governments reduce the number of people who are not eligible to work from the calculation. This includes children under the age of 16 or 18 depending upon the country. It also includes senior citizens i.e. people above the age of 60 or 65 depending upon the country. It is ironical that most government around the world tax the incomes generated by senior citizens. However, none of them take the accountability of providing them with a job of needed. In reality, a lot of senior citizens do work because of financial constraints or personal free will. They are simply omitted from the calculation. Also, they are the group that is the worst hit, in case, the unemployment rate goes down!

Not Interested In Working

The next category of people, that are excluded from the calculation are the people that the government believes are not interested in working. This category could include people who wish to live off the estate that has been left to them by their ancestors. Also, the most common category of people included here are housewives and students. The types and number of people that are excluded from the calculation based on this pretext are under serious scrutiny. For instance, most economists around the world agree to the fact that the wrong kind of people are filtered out at this stage. The best example of this would be the famous “discouraged worker” flaw which will be discussed in the forthcoming articles.

Labor Force

Hence, once we exclude the people who cannot work and the people who do not wish to work from the total population, we reach a number called the labor force. This number is of paramount importance when it comes to unemployment statistics. This is because almost all of these statistics use this number as their denominator. This the number that the government must take accountability for meaning that the government must theoretically ensure that as many of these people find jobs as possible.

Labor Force Participation Rate

This brings us to an important statistic pertaining to the unemployment rates i.e. called the labor force participation rates. The labor force participation rate is an intermediary statistic that is calculated to reach the denominator that will be used in the calculation. For instance, if the labor force participation rate is 75%, then the government is only considering 75% of the population when it declares the official unemployment rate.

Unemployed

The last subset is that of unemployed people. These are people who the government, based on their subjective definition, considers to be able and willing to work. These people form the numerator in the ratio. Also, this number is an estimate based on a survey and hence is prone to errors. Thus, the final two sub-sets which are used in the equation are labor force and unemployed people. The criticisms of the unemployment rate are based on the issue of what is excluded from the calculation.

The Golden Rule: Look at Both the Numbers

In the next article, we will have a look at how to interpret the unemployment numbers like an expert. However, for the moment, it is important to realize that the unemployment rate is not the “be all end all” statistic. The correct picture only emerges only after both the labor force participation rate as well as the unemployment rate is seen in tandem.

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