Question

You are watching the national news with your roommate. The news anchor says, "Unemployment statistics released by the Department of Labor today show an increase in unemployment form 4.1 percent to 4.2 percent. This is the third month in a row where the unemployment rate has increased." Your roommate says, "Every month there are fewer and fewer people with jobs. I don't know how much longer the county can continue like this."

Can your roommate's statement be deduced from the unemployment rate statistic? Why or why not? What information would you need to determine whether there are really fewer people with jobs?

Answer 1

Your roommate's statement can't be deduced from the unemployment rate statistic, because it shows only the ratio between number of unemployed and labor force but not the absolute value of people without work. We need absolute number of people unemployed to determine whether there are really fewer people with jobs.

To calculate unemployment rate, you’d take the number of unemployed divided by the labor force. And the labor force = the number of people employed plus those who are unemployed. So yes, we can have an increase in the number of people who are employed as more of the unemployed gain a job. They switch from being unemployed to employed.

Example Let's suppose unemployed people in economy is 50. And Employed people in economy is also 50. Then Labor Force = 50 + 50 = 100.

So Unemployment Rate = 50/100 * 100 = 50%

Now let us suppose number of unemployed people increase by 25 and number of employed people increase by 20. Now

New Unemployment Rate = 75/145 * 100 = 51.8%. So, we see that unemployment rate had increased but both number of Employed and Unemployed people have also increased.

However, we can also have discouraged workers re-enter the workforce. Discouraged workers are those who gave up looking for work, so they’re not counted as unemployed because they dropped out of the labor force. So if enough discouraged workers re-entered the labor force to be counted as unemployed, it is possible for the unemployment rate to increase at the same time the employment rate went up.