Is Unemployment Undercounted?

You may recall from our previous video that to be counted in the official unemployment rate in the U.S., you have to be an adult without a job and have actively looked for work within the past four weeks. That means that if someone has given up looking for a job, even if they want one, they are no longer counted under the official definition.

Does this mean that unemployment is undercounted? In other words, is the unemployment rate in fact higher than is reported?

Some have claimed this to be the case. However, unemployment is a tricky statistic. It’s important to consider that adults without jobs can fall into different categories. Many retirees, for example, are willing to leave retirement and take a job for the right price. If we are counting people that aren’t actively looking for employment, shouldn’t the retirees also be considered unemployed?

The simplest solution to this conundrum is to only count unemployed adults actively seeking work.

But what about discouraged workers -- those who are unemployed and have not sought work in the past four weeks, but have sought work in the past year. Should we consider them in our calculations?

There are actually six different unemployment rates measured by the U.S. Bureau of Labor Statistics. The various rates have less and more stringent criteria. The official rate, called U3, falls somewhere in the middle. Another rate, called U4, does include discouraged workers in its calculation. All six rates follow a similar track over time.

So while the official unemployment rate may not be perfect, it does provide us with a good indicator of the state of the labor market and where it’s headed.

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