Understanding How the Feds Calculate the Unemployment Rate and What it Means

This article is part of MACo’s Policy Deep Dive series, where expert policy analysts explore and explain the top county policy issues of the day. A new article is added each week – read all of MACo’s Policy Deep Dives.

The United States Department of Labor Bureau of Labor Statistics (BLS) releases monthly data on jobs and unemployment. This information provides critical insight into the health and projected well-being of the national economy, American workers and employers, and specific industries.

Here, Conduit Street breaks down how the federal government calculates these rates and what they mean for states and local governments… with a particular focus on Maryland.

What is the unemployment rate, and how is it calculated?

The unemployment rate measures the share of workers in the labor force who do not currently have a job but are actively looking for work. The measure does not include people who have not looked for work in the past four weeks.

According to the Economic Policy Institute (EPI):

There are several reasons the unemployment rate rises or falls. Although a clear reason is a change in the number of job seekers, the unemployment rate may also be affected by a change in the size of the labor force. When workers become discouraged and stop looking for employment, they leave the labor force. It is common in economic downturns for the labor force to decrease (or increase more slowly than usual) in size as many give up on finding work and are therefore no longer counted as officially unemployed. For that reason, economists often point out that the unemployment rate is misleading and understates the labor market’s weakness. Conversely, during an economic recovery, high unemployment rates can persist despite an increase in jobs as more workers begin looking for work and re-enter the labor market.

The Federal Bureau of Labor Statistics (BLS) measures job data and determines the national unemployment rate. Here’s how BLS does it:

  • Each month, BLS surveys people around the country.
  • People are divided into three categories based on their responses: employed (having a job), unemployed (not having a job and actively seeking one), and not in the labor force (people who are not working and not seeking work, such as students, the retired, and caregivers).

  • To calculate the unemployment rate, BLS first adds the employed and unemployed to get the labor force.

  • Then, BLS divides the number of unemployed by the labor force.

  • The result is the unemployment rate.

Why is the unemployment rate significant?

According to Forbes, unemployment is “one of the most important measures that economists track to gauge the health of an economy. In general, low unemployment rates mean an economy is strong because most workers can find jobs.”

Some recent trends in unemployment, according to Forbes:

  • Unemployment has consistently fallen since December 2021: Recently, the unemployment rate has remained low despite rounds of layoffs at tech companies and growing fears of an oncoming recession.
  • One factor behind declining unemployment could be a slow recovery in the labor force participation rate since the onset of COVID: Since the start of the pandemic, the labor force participation rate has remained below historical levels. Some explanations for the lower participation during the pandemic might include the following:
    • Increased dependent care needs;
    • Fear of getting COVID;
    • Higher unemployment benefits;
    • Desire for higher wages reducing interest in low-paying jobs;
    • Higher pace of retirement due to an aging population; and
    • Slower population growth.
  • However, labor force participation has also been on a downward trend for decades due to longer-term factors like an aging and retiring population.

With these considerations, some experts speculate that national unemployment remains low because of the decreasing labor force participation, essentially driving the pool of potential workers (and the denominator in the unemployment rate formula) downward.

Where do the country and Maryland currently stand?

Updated employment data released on June 17 showed that total nonfarm payroll employment increased nationally by 339,000 jobs in May 2023, while the unemployment rate rose by .3 percent to 3.7 percent. The same data reported that Maryland gained 10,500 jobs in May, and the unemployment rate decreased to 4% — the lowest since the beginning of the COVID-19 pandemic.