Friday, January 7, 2011

Understanding the Decline in the Unemployment Rate

The press is reporting a drop in the unemployment rate to 9.4%. This sounds like good news but one needs to understand how the unemployment rate is calculated in order to evaluate the drop in the rate. The rate is calculated by dividing the number of unemployed by the size of the workforce. The workforce consists of those with jobs and the unemployed who are looking for jobs. Since large numbers of the long-term unemployed have stopped looking for jobs, they are not part of the workforce and the size of the workforce has decreased. The 100,000 jobs that were created is not sufficient to cover the monthly entry of new workers into the labor force.

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