An attempt to understand the world of current events, finance and the economy on a level that allows me to teach it. I'm a journalist. Oh and the occasional post about family, life and kids!
Unemployment rate. Jobless claims. Long-term unemployed. These are admittedly confusing words we all hear thrown around the media frequently. I’m going to break this down with a very simplistic explanation of WHAT THE HELL IT MEANS, so maybe we can all sound smarter to our friends.
To begin, the national unemployment rate is calculated every month by the Bureau of Labor Statistics, or BLS. In a “healthy” economy (which is subjective, I understand), the natural unemployment rate should not be higher than the low-to-mid 6 percentile. Theoretically, a 0% unemployment rate is not attainable due to natural seasonal factors and the reality of Frictional Unemployment, which is simply the time spent between one job and another; the “job-searching” period.
So how could it be so terrible that the rate dropped 2/10 of a percent? Lower unemployment is good right?! Well not necessarily. The key lies in how the BLS compiles the data. Here’s the breakdown:
There are roughly 300 million people in America. Out of those 300 million, the BLS subtracts those who can’t work, those who are too old to work, and those who ARE NOT LOOKING for work. BINGO!!! Here’s the magic key! That’s right, if you’re an able-bodied American and simply don’t want to work and are not looking, you DO NOT get counted in the unemployment rate.
When we subtract those people, we have only about 154 million individuals whom the BLS counts as IN THE LABOR FORCE. In other words, there are only 154 million people in the U.S. available to work, so that’s the number they use to calculate the unemployment rate.
Next is also fairly simple. They look at how many people don’t have a job. The number as of now is roughly 12 million people. They simply divide the number of unemployed (12 million) into the labor force (154 million) and there ya’ have it!
But again, why would the unemployment rate decreasing be a bad thing? Think about it. Use your deductive reasoning skills.
Here’s the answer: From July to August, more people STOPPED looking for work, which effectively removes them from the “unemployed” category, which in-turn lowers the unemployment rate. The hard number is this: 368,000. That’s correct, in one month, 368,000 Americans just stopped looking for work, which lowered the unemployment rate to 8.1%.
That is why the decrease is NOT always a good thing. Further, the labor force participation rate, which is the amount of individuals in the labor force divided by the total population is at 63%, which is the lowest point in 31 years. As a fun fact, the real unemployment is 13.7%.
Here’s a phenomenal video from CNN that also helps explain the concepts: Money.CNN.com
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Hope that helps.