The unemployment rate is a key economic indicator. Generally, when the unemployment rate drops, consumers and investors spend more money. The US labor force is made up of more than 160 million individuals, which makes it too difficult to calculate unemployment by tracking every individual looking for a job. Additionally, tracking the unemployment rate by the number of unemployment claims would exclude individuals who never applied for unemployment or have exhausted their benefits also creating additional challenges in calculating the rate.

In the 1940’s, a survey was created to calculate the national unemployment rate by phone calls and door to door soliciting. This survey divides the nation up by 2,000 areas and samples 800 of those areas for each survey. Each month, 60,000 households are contacted and questioned about their employment status. Around 2,700 workers spend up to 10 days contacting each household included in the survey, which reaches around 110,000 individuals. Each month, 25% of the households are replaced to refresh the sample size and make it stronger. The survey relies on four concepts to establish the distinction between who is in the labor force, and who is employed vs unemployed:

  1. People who are neither employed nor unemployed are not in the labor force (i.e. those not searching for work such as the retired, stay at home parents, wealthy individuals that do not have to work, etc.).
  2. The labor force is made up of the employed and unemployed (i.e. those that are seeking employment).
  3. People who are jobless, looking for a job and available for work are unemployed.
  4. People with jobs are employed.

CNBC has created an educational video that explains this topic that you can view here: