The unemployment rate describes the proportion of a country’s labor force that is without a job even though it’s willing and able to work. It is one of the broadest and most commonly used indicators of the strength and health of an economy (see also most relevant economic indicators). In fact, there are several different unemployment rates, depending on the scope and definition of the labor force. The most widely used rate is the so-called U3 unemployment rate, which can be calculated using the formula below:
U3 Unemployment Rate = (Unemployed/Civilian Labor Force) x 100
In the following paragraphs, we will take a closer look at each of those components and learn how to calculate the unemployment rate step-by-step.
1) Find Civilian Labor Force
To calculate the unemployment rate, we first have to find the civilian labor force. The civilian labor force includes all people aged 16 or older who are employed or actively looking for a job (see also BLS Labor Force Definition). That means it only considers people who are willing and able to work. Thus, the labor force does not include retired workers, students, institutionalized people, and people who are simply not looking for a job anymore due to a lack of opportunities. In addition to that, the civilian labor force also excludes active-duty military personnel.
To illustrate this, think of an imaginary country called Smolland. As the name suggests, Smolland is extremely small and only has 200 inhabitants. Out of those 200 people, 50 are children (i.e., below the age of 16), 10 are full-time students, 15 are on active duty in the army, 25 are retired, 15 are stay-at-home parents, and 5 are currently in prison. These people are not classified as members of the labor force because they are not willing and/or able to work. Therefore, Smolland’s civilian labor force consists of 100 people (i.e., 200 – 30 – 15 – 10 – 25 – 15 – 5).
2) Find Number of Unemployed People
Once we know the labor force, the next step is to find the number of unemployed people in the economy. According to the Bureau of Labor Statistics (BLS), people are classified as unemployed if they are not employed but available and actively looking for work. In other words, the number of unemployed people includes all members of the civilian labor force who are not currently employed.
In the case of Smolland, we know that the labor force consists of 100 people. Now, assume out of those 100 people, 95 are employed by private companies and government entities (excluding armed forces). In that scenario, the remaining 5 citizens are classified as unemployed.
3) Divide Unemployment by Labor Force
With the information collected above, we can now compute the unemployment rate. To do this, we have to divide the number of unemployed people by the civilian labor force (i.e., unemployed / labor force). This step is important because it converts absolute numbers into relations, which is necessary to compare the result with other countries of different sizes.
For example, we have determined that Smolland has a civilian labor force of 100 people. This includes 5 people who are currently unemployed. Thus, the country’s unemployment rate can be calculated as 0.05 (i.e., 5 / 100).
4) Multiply the Result by 100 (Optional)
Finally, we can multiply the result by 100 to convert the rate into a percentage. This makes it much easier to interpret and compare the result because most unemployment rates you will come across are reported as percentages.
In the case of Smolland, the rate we calculated above (0.05) multiplied by 100 is equal to 5. Thus, we can say that the country has an unemployment rate of 5%. Or in other words, 5% of all people in Smolland who are willing and able to work are currently without a job.
In a Nutshell
The unemployment rate describes the proportion of a country’s labor force that is without a job but available and actively looking for work. The U3 unemployment rate can be calculated by (1) finding the civilian labor force, (2) finding the number of unemployed people, (3) dividing unemployment by the labor force, and (4) multiplying the result by 100.