It’s tough to say whether we’re officially in a recession, but unemployment rates are traditionally one of the most reliable metrics to gauge how the economy is faring. However, the figures most often reported in the media don’t paint the whole picture. In fact, the Bureau of Labor Statistics (BLS) calculates the unemployment rate in six different ways. Here’s what you need to know about the real unemployment rate, and how it might give a more accurate read of the state of the labor force.
What are the different way the unemployment rate is calculated?
First things first, some definitions: The BLS defines “unemployment” as being “jobless, actively seeking work, and available to take a job.” From there, the nation’s official unemployment rate is the number of unemployed as a percentage of the labor force (the sum of the employed and unemployed). In other words, the unemployment rate you see reported in the media is the percentage of the people without a job who could have one.
As we noted, the BLS calculates six different rates to measure unemployment. The most widely used (and cited) is the U-3 rate. However, the most comprehensive statistic reported is called the U-6, aka the real unemployment rate.
Why the real unemployment rate is more comprehensive
The standardly used, “official” unemployment rate (U-3) only counts those who have looked for a job in the last four weeks. The real unemployment rate (U-6) uses a broader definition of unemployment, one that might paint a more accurate picture of the state of the labor force. Crucially, the U-6 calculations includes underemployed, marginally attached, and discouraged workers.
As Politico explained, much of U.S. labor force is “functionally unemployed”; that is, people who are actively looking for work but can’t land a full-time job, part-time workers who earn below the poverty line, or who otherwise fit into another, broader understanding of unemployment that isn’t factored into the official U-3 rate.
The Balance puts it in to context like this, using early pandemic numbers: The official unemployment rate reached a peak of 14.8 percent in April 2020. The real unemployment rate—which factors in the “functionally unemployed” described above—was 22.9 percent. The higher figure may give a more accurate read of how the labor force was impacted at the onset of the pandemic.
In July 2022, the official unemployment rate was 3.5 percent, while the real unemployment rate was 6.7 percent (per the BLS). If you’re curious, the BLS has published the unemployment rate every year since 1929.
How to calculate the real unemployment rate
To better understand how the BLS calculates the real unemployment rate, The Balance simplifies it to these three steps:
- Add the number of officially unemployed plus marginally attached workers to those who work part-time for economic reasons. This gives you the broader range of underemployed people.
- Add the number actively in the labor force to the number of marginally attached workers.
- Divide the total number of under/unemployed (from step 1) by the total labor force (from step 2).
The BLS calculates this real rate for you, but if you want to double-check their math, you’ll want to acquaint yourself with their data-finder tool.
The bottom line
Unemployment is far from the only metric used to assess the health of the economy, but it’s undoubtedly one of the most telling indicators the public has available. Although there’s one “official” unemployment rate that gets reported in the media, it’s important to consider a broader definition of who exactly counts as un- and under-employed. Looking at alternative calculations—especially the real unemployment rate—allows us to get a better idea of how the nation’s workforce is actually doing.
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