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The Unemployment Rate and Simple Division

By: Grant Moon 09/24/14 03:40 pm

The Fed has mentioned many times the Unemployment Rate is one of the key numbers they watch as they ponder the possibility of higher rates. September’s unemployment rate will be announced October 3rd, the first business Friday of the month. Last August, the unemployment rate fell to 6.1 percent. Two years ago the rate was at 7.8 percent. The unemployment rate is an indicator of the health of the economy. The lower the rate, the better we’re doing, right? Not so fast.

The Department of Labor surveys a preselected pool of citizens, 160,000 of them each month and asks if they’re employed, part time or full time, if they’re not employed and looking for work or if they’re simply left the workforce altogether and have stopped looking. The rate is calculated dividing the number of unemployed people by the total work force. And that’s where numbers can be deceiving.

If more people leave the work force altogether, the total work force declines. That means from month to month the very same number of people can be out of work and actively looking- the officially unemployed- yet divided by a smaller number. The rate will fall not because the economy is healing but due to a lower denominator.

The unemployment rate is important, just know how it’s calculated before making any predictions on the economy.

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