The official unemployment rate may understate the true rate of unemployment because of

The Current Population Survey (CPS), conducted by the U.S. Bureau of Labor Statistics (BLS), is a crucial data source on unemployment in the U.S., used to examine patterns and trends in unemployment. The national unemployment rate is determined as a result of this survey; the media then tout this number to summarize the state of the economy and its workers.

But the unemployment rate in the U.S., as reported using the CPS method, doesn't provide essential details about how American workers are really faring and how race and gender impact unemployment and underemployment. It is essential to examine the many factors not taken into account by the Current Population Survey, like whether or not an employed person has taken unpaid leave, how many workers are underemployed and not earning enough money to pay their bills, or if a worker has given up on their job search.

Key Takeaways

• The national unemployment rate is determined as a result of the Current Population Survey (CPS), conducted by the U.S. Bureau of Labor Statistics (BLS).
• The true percentage of people who don't have jobs or aren't making enough money is often worse than the official unemployment rate suggests because the Current Population Survey (CPS) doesn't collect certain information from those surveyed.
• The CPS report doesn't take into account whether or not workers are employed full-time, if they are underemployed, or if a worker has given up job searching.
• CPS does not account for how gender and race impact employment or unemployment.

What the CPS Counts

According to the BLS website, the CPS counts the following people as employed:

• All persons who worked for pay or profit during the survey reference week.
• All persons who did at least 15 hours of unpaid work in a family-owned enterprise operated by someone in their household.
• All persons who were temporarily absent from their regular jobs, whether they were paid or not. (This includes persons who were on vacation, ill, experiencing child-care problems, dealing with family or personal obligations, on maternity or paternity leave, involved in an industrial dispute, or prevented from working because of bad weather.)

What Information Is Missing From the CPS?

Clearly, the CPS is an important measure, but it can't tell us everything about the state of unemployment in the U.S. For example, CPS does not compare the difference between the unemployment of men and women. According to documentation by the Pew Center in February 2021, the official unemployment rate for women (6.1%) had fallen below the rate for men (7.0%), not seasonally adjusted.

By February 2022, however, seasonally adjusted unemployment was at 3.6% for women and 3.5% for men, suggesting that the gap that had widened between women and men during the pandemic has started to narrow.

The CPS does break down race and age impact unemployment but it still doesn't tell the full story. For example, in Q4 of 2021, the unemployment rate for a white male aged 25 years to 55 years was 2.9% for a black man in the same age range, it rose to 7.0%. A Hispanic or Latino male in the same age range was 3.9% and an Asian male 3.0. The differences between men and women, and minority groups are not strongly highlighted in the survey.

Here are some factors that impact workers in the U.S. but are not accounted for in the CPS.

Whether Workers Have Full-Time Hours

The CPS counts people as employed if they are working at part-time or temporary jobs, regardless of the number of hours worked or whether this employment represents a sufficient or ideal employment situation for that worker. If a laid-off consultant works 10 hours at a fast-food restaurant, they would be counted as employed.

However, this employment is likely neither sufficient to pay their bills nor ideal for this individual (or society as a whole), given that they are qualified to do more challenging, more productive, and higher-paying work.

Whether Workers Are Underemployed

The consultant working as a server at a fast-food restaurant is an example of something else that is not measured by the unemployment rate: underemployment, or working at a job that requires fewer skills and offers lower pay than the best jobs for which a worker is qualified. The consultant would also be considered an involuntary part-time worker, yet another factor the unemployment rate does not consider.

Whether a Worker Has Given up Job Searching

The BLS only counts as unemployed those who "do not have a job, have actively looked for work in the prior four weeks, and are currently available for work." If you have a cold (known as a "temporary illness"), you are still considered available for work by the survey.

However, if the state of the economy is so bad that you become depressed about losing your job, or your recent attempts at job searching have been so futile that you haven't attempted to get a new job in the last four weeks, you are no longer considered unemployed. Instead, you become "marginally attached" to the workforce or a "discouraged worker" and are no longer counted in the unemployment rate.

Other people not considered part of the labor force include prisoners, people confined to nursing homes, members of the Armed Forces on active duty, homemakers, students, and retired persons.

What the Unemployment Numbers Mean in Context

Another problem with the unemployment rate is that it cannot be used to accurately compare unemployment levels from different years namely because of the changes in age makeup of the population, and other factors.

For example, during the height of the coronavirus pandemic, the unemployment figures rose as employment plummeted, especially in the tourism and hospitality sectors. The sudden rise in unemployment was not reflective of society under regular conditions, as the pandemic impacted many jobs.

In addition, government methods of measuring the unemployment rate may change over time, as they did in 1994 when the BLS overhauled the CPS, changing its questionnaire and some of its labor-force concepts.

True Unemployment Is Not Reflected in the Unemployment Rate

There are many problems with relying too heavily on the national unemployment rate as a meaningful indicator of the state of the economy and its workforce. Workers who have given up actively seeking a job, are not counted in the unemployment rates, freelancers or gig workers who recently lost clients may not be counted as unemployed, and the rate doesn't specify whether workers are employed on a part-time basis, or a full-time one. Unemployment figures don't examine the poverty rates for workers, many of whom are under-employed in jobs within industries like retail.

Another form of unemployment is long-term unemployment, which means going at least 27 weeks or longer without a job, and the unemployment rate doesn't specify how long someone has been without work. All of this means, unfortunately, that the true percentage of people who don't have jobs or aren't making enough money is often worse than the official unemployment rate suggests.

How Is the U.S. Unemployment Rate Calculated?

The unemployment rate for any state is calculated by taking the number of residents in a state who are unemployed and seeking employment divided by the total number of state residents in the labor force.

What Are the Main Types of Unemployment?

The four main types of unemployment are frictional, structural, institutional, and cyclical unemployment.

What Is the Natural Rate of Unemployment?

Natural unemployment is the lowest unemployment rate resulting from voluntary or real economic forces impacting the workplace. It represents the number of individuals unemployed due to the structure of the labor force, including those who lack the education or skills necessary to be hired and those replaced by technology.

Where Can You Find Unemployment Rates by State?

Unemployment rates by state can be found on the BLS website.

The Bottom Line

The BLS states on its website that "people are classified as unemployed if they do not have a job, have actively looked for work in the prior 4 weeks, and are currently available for work." However, these figures rarely tell the full story of unemployment in the U.S., and there are many factors, as previously discussed, that are not included in the data but play a role in unemployment rates.

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How the unemployment rate can understate the true level of unemployment?

Why might the unemployment rate underestimate the true extent of unemployment?

What are two reasons the unemployment rate is understated?

Which of the following causes the unemployment rate to understate the true extent?