The unemployment rate is the share of individuals who are looking for work who cannot find a job. The Bureau of Labor Statistics (“BLS”), which calculates the monthly unemployment rate, defines “looking for work” as someone who has actively sought a job within the last four weeks. The BLS calculates the unemployment rate using a survey of households, while it calculates the number of jobs added each month using a survey of establishments.
The measurement of unemployment creates many challenges. Most prominently, the “looking for work” requirement creates some tricky side effects. Naturally, economists do not want to count senior citizens, students and those who do not wish to seek formal employment outside the home in the unemployment rate since that would create an erroneously high rate. However, during a recession, many workers may become discouraged from the lack of jobs and “drop out” of the labor force and thus not get counted and downwardly biasing the unemployment rate. Likewise, many people return to school or retire early during rough economic times (or defer school or defer retirement during hot labor markets), which can make estimating the size of the “labor force” quite difficult.