Don't take the unemployment rate at face value.

The media will use the unemployment rate as one figure to indicate how well the economy is doing. If the unemployment rate is low, that is a good indication that the economy is recovering. This isn't necessarily the case though.

The average American thinks the unemployment rate is the total number of people not working divided by the sum of people not working and people working. What a lot of people might not realize is that the unemployment rate is calculated as follows.

Total number of people that are looking for work divided by the total labor force (people not working who are looking for work and people working.

If people stop looking for work, they aren't counted in the unemployment rate. When a man gives up on looking for a job, this actually makes the unemployment rate go down. We can take a look at this mathematically.

Let's pretend the total labor force is 100 people. Out of that hundred, 10 people are looking for work and 90 people are unemployed. Our unemployment rate is 10% (10/100).

After a few interviews, Bill gets a job manufacturing plastic flamingos.

Bill is now employed. Our total labor force still has 100 people. Out of which, 91 people are employed and 9 people are unemployed. Our unemployment rate is now 9%.


This is what we want, we want as much production as possible. However, let's see what would have happened if Bill just gave up.

So, instead of continuing the job search, Bill gets discouraged after 20 job interviews and 20 rejections. Bill decides to stop looking for work and either moves in back with his parents or goes on the government dole.

When Bill stops looking for work, he is removed from both the unemployed number and the labor force number.

Now our labor force is 99 people. Out of which, 90 people are employed and 9 people are unemployed.

The unemployment rate is now 9.09% (9/99).

This rate is still lower than the initial rate of 10%.

When looking at the unemployment rate, it is also useful to take a look at the labor force participation rate. The last time I checked, the labor force participation rate reached a peak in 1999 or 2000 at more than 67% and it has been declining ever since. Today the rate is at less than 63%.

These figures can be found at the Bureau of Labor Statistics.