What is Unemployment and How Do We Measure It?

The unemployment rate is calculated by dividing the number of unemployed individuals by the total labour force and then multiplying by 100. But what does this really mean? The labour force includes individuals over the age of 16 who are either employed or actively seeking employment. Currently, the USA has around 167 million people in the active labour force, yet the actual working-age population is much larger.

Labour Force Participation Rate

To better understand the unemployment rate, we use the labour force participation rate, which is calculated by dividing the labour force by the civilian noninstitutional population and multiplying by 100. The civilian noninstitutional population includes anyone over the age of 16, except active duty members of the U.S. Armed Forces and those confined to institutions like prisons and detention centres.

As of today, the labour force participation rate is around 62%, and it has been declining steadily for the past 24 years. Despite a significant increase in women's employment and life expectancy, fewer people are willing or able to participate in the labour market. This decline raises important questions about the health of our economy and the opportunities available to working-age individuals.

Digging Deeper into Unemployment

Since 1940, the unemployment rate has been measured every month in the United States. Every month, the Bureau of Labour Statistics (BLS) interviews 60,000 households (around 110,000 people) to assess their employment status. This sample size is intended to provide a diverse representation of the U.S. population.

However, it's important to note that the BLS acknowledges this is not an exact statistic: "A sample is not a total count, and the survey may not produce the same results that would be obtained from interviewing the entire population." Despite its limitations, this data provides valuable insights into employment trends.

Who Counts as Unemployed and Employed?

People are considered employed if they did any work for pay or profit during the survey reference week, including unpaid workers who help in a family business. For example:

1. Garrett, 16, helps with chores on his parents’ farm for about 20 hours each week, even though he doesn’t receive any pay.
2. Lisa takes care of her home and children but helps in her husband's computer software business all day Friday and Saturday.

Both Garrett and Lisa are considered employed. On the other hand, people are considered unemployed if they have been actively looking for a job in the prior four weeks. If someone stops looking for a job actively, they are excluded from the statistics. Participation in the survey is voluntary.

Considering these factors, the unemployment rate in the USA in 2023 was just 3.5%. This is the number often reported by news outlets and referred to by politicians. However, the BLS provides alternative measures for unemployment, such as the U-6 unemployment rate. The U-6 rate includes those who are underemployed, marginally attached to the workforce, and have given up looking for work. In 2023, the U-6 unemployment rate was around 7%. Given the limitations of this survey, including sample size and measurement errors, even the reported unemployment rate doesn't capture the full picture. In reality, the unemployment rate is likely in the double digits, painting a much grimmer scenario.

Beyond the Numbers: Income and Stability

Even if we conservatively estimate the actual unemployment rate at 10%, does that mean 90% of people have stable jobs? Let's look at the median personal income of an average American. According to the 2023 Current Population Survey, the median annual income was $40,480. That means 50% of people earn less than $40,000 a year. This income doesn't allow for a comfortable living, especially in major cities where a comfortable life typically requires earning over $90,000 a year.

The Impact of Increased Productivity

We are experiencing a decreasing level of labour force participation, an increasing unemployment rate, and even those employed often struggle to earn a decent living. The main cause of this trend is a massive increase in human productivity. Contrary to common belief, increased productivity doesn't necessarily lead to lower unemployment. Human productivity has nearly doubled in the last 35 years. Today, one worker can perform the same amount of work as two workers in 1990, thanks to advancements in technology.

As productivity increases, the need for human interference in processes decreases. This doesn’t mean humans have become smarter; it means we have better tools. For example, farmers use tractors, accountants use Microsoft Excel, and econometricians use MATLAB. Many jobs today can already be fully replaced by machines or software systems. With the rise of AI, this process will accelerate, leading to decreased demand for certain jobs and the complete elimination of some professions.

Potential Solutions

We have never experienced such a trend, so it is challenging to find economic solutions from history. One potential solution to increasing unemployment is introducing Universal Basic Income (UBI). UBI is a social welfare program that provides a minimum basic income to all adults without any conditions. In 2017, Finland ran a UBI experiment where 2,000 individuals received 560 euros a month for two years without any obligation. The experiment showed that UBI can lead to people building start-ups and staying productive, rather than becoming passive consumers. Guaranteeing basic necessities frees up time for people to pursue what they care about.

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