How Is The Unemployment Rate Calculated?
By Brad Eldredge, Senior Economist — revised November 18, 2005
In simple terms, the unemployment rate is the number of people looking for work divided by the total number of people in the labor force.
The national unemployment rate is computed solely from the Current Population Survey (CPS) of about 60,000 households conducted by the Census Bureau. Residents of selected households are interviewed about their work experience. From these responses, the Bureau of Labor Statistics then estimates the size of the labor force and the number of people who are jobless.
Montana's unemployment rate and the rates for its individual labor market areas are computed by the Research and Analysis Bureau, Department of Labor and Industry in conjunction with the Bureau of Labor Statistics.
Montana's CPS survey includes 431 households, which is to small a sample to calculate unemployment rate with a reasonable margin of error. Additional information must be used to determine the state's unemployment rate, including the number of nonagricultural jobs in the state and the number of people getting unemployment insurance benefits. This data is entered into a statistical model that produces Montana's labor force estimates.
Individual county, city and metropolitan area rates require even more information. Analysts estimate:
- How many agricultural workers are employed
- How many people are self-employed, unpaid family workers, or working in private households
- The number of people getting unemployment insurance
- Those who have exhausted their unemployment benefits but may still be out of work
- The number of newcomers and people re-entering the workforce
- Agricultural unemployment
These estimates are entered into the model. A complex mathematical process called "additivity" is used to make the numbers for the labor market areas match the state total.
Unemployment estimates are revised on a monthly and yearly basis as updated information becomes available. This includes updated information for census, unemployment claims, household surveys, and employment information.
Most economists agree that a rate around 4.5 percent constitutes full employment — the point at which the number of available jobs matches the number of people seeking work. If unemployment rates drop below the full employment level, a labor market may begin to experience labor shortages and upward pressure on wages.
The unemployment rate has specific limitations. It can't differentiate between full-time and part-time jobs. It doesn't account for people who are underemployed, or working in jobs for which they are overqualified because they can't find a good job. It won't tell you how many people have become so discouraged in their job search that they have given up hope of finding a job.
Economists concede that there is a margin of error in the rate calculation. Currently, Montana’s statewide unemployment rate estimate has a margin of error of +/- 0.8%. Because of budget limitations, the Bureau of Labor Statistics cannot conduct household surveys in each labor market. Rates for small areas are less precise than larger areas. Although it's not 100 percent accurate, the unemployment rate provides a reasonable approximation of what it is supposed to measure. All states use the same method of calculating the unemployment rate, so rates are comparable across the nation.