Read the numerator and denominator together.
The unemployment rate is unemployed people as a share of the labour force: employed plus unemployed. People who are neither employed nor actively seeking and available for work are generally outside the labour force. A fall can reflect more employment or people leaving the labour force. Employment quality, hours and pay also affect living standards.
- Who is counted?
- The labour force is employed people plus unemployed people. Unemployed people generally have no job and are seeking and available for work; other people without jobs can be outside the labour force.
- The rate
- Unemployment rate = unemployed people / labour force x 100. The denominator, the total below the fraction line, is not the whole population.
- Watch for this
- The rate can fall because people stop looking for work. Check employment and participation: the share of the working-age population that is in the labour force.
Worked example: A fall without new employment
Initially 90 people are employed and 10 unemployed. Later employment remains 90, while 5 of the unemployed stop looking and leave the labour force. The reported unemployment rate falls from 10% to about 5.3%.
- Initially the labour force is 90 + 10 = 100, so the rate is 10 / 100 x 100 = 10%.
- After five people stop looking, the labour force is 90 + 5 = 95. The rate is 5 / 95 x 100, about 5.3%.
- The rate falls without anyone gaining employment; household income prospects have not necessarily improved.
Watch out for this
Everyone without a job is unemployed.
Use the employment-status definition. A full-time student not seeking work is not necessarily in the labour force.
Check your understanding
Which additional evidence best tests whether a falling unemployment rate reflects better job opportunities?
- The population's favourite leisure activity.
- Nominal GDP alone.
- Employment numbers, participation and hours worked.