Unemployment

Let's begin today by taking a look at the unemployment rate in the United States. If we Google "unemployment rate United States FRED," we'll get this graph from the St. Louis Federal Reserve economic database. We can see from the graph that the unemployment rate fluctuates. Since 1950, it's averaged about 6% per year, but it dipped below 3% once, and it had highs of 10.8% in December of 1982, and almost as high, 10%, in October of 2009, the Great Recession.

Not surprisingly, the unemployment rate increases during recessions, and those are shown by the shaded areas. Perhaps a little bit more surprisingly, the unemployment rate is never zero. Not even in a boom. In a growing economy, lots of things are changing. And even as some firms are expanding, others are shutting down. Workers -- they're moving about, they're entering the work force, they're looking for new jobs and so forth. We'll talk more about that in an upcoming video.

Now let's look at how unemployment is defined. A person with a job is employed. But in the official definition, not everyone without a job is unemployed. Is a six-year-old unemployed? Is a prisoner unemployed? What about a retiree? In each of these cases, the official answer is no. A person is counted as unemployed only if they're an adult, non-institutionalized civilian without a job, and actively looking for work. The most important part of this definition is that to be considered unemployed, a person must be out of a job, but actively looking for work. And that means that they must have taken some action to find a job in the last four weeks. The unemployment rate is the number of people who are unemployed divided by the number of people in the civilian labor force -- the employed plus the unemployed.

Let's add the civilian labor force and the number of unemployed people to our graph to see all of these relationships, and get an idea of the magnitudes. We can see, for example, that in February of 2015, there were 157 million people in the labor force. Of these, 5.5% were unemployed, which means that there were 8.6 million unemployed people. Now in case you don't want to check those calculations, let's make it easy. Let's go to January of 1978. At that time there were about 100 million people in the labor force. The unemployment rate was 6.4%, and there were 6.4 million people unemployed, just as expected.

In the next video, we're going to look at a common criticism of the unemployment rate: Is unemployment undercounted? Is there a conspiracy to undercount the unemployment rate?