What is Unemployment Rate? Calculation and Formula

Table of Contents

What is the unemployment rate?

The unemployment rate refers to the proportion of the workforce that does not have a job. In other words, it is the percentage of unemployed people in the economy among those that are in the labor force. It is a lagging indicator which means that it generally rises or falls in response to the waves of economic changes. The economists and analysts expect the unemployment rate to rise when the economic situation is poor with job scarcity. On the other hand, jobs tend to be abundant when there is a healthy growth rate in the economy.

It is important to note that people who are not actively in search of a job but want to work do not fall under the category of unemployed. Also, those who quit or stop looking for a job for certain reasons such as disability, further education, retirement, and other personal issues are not classified as unemployed.

Workers that are unemployed must maintain at least consumption in the period of unemployment. By implication, a country with high unemployment has lower output without a proportional decline in the need for basic consumption. When unemployment is high and persistent, it shows a sign of serious economic distress thereby leading to social and political disruption.

On the other hand, a low unemployment rate implies that the economy is more likely to be producing close to its full capacity, maximizing output, driving the growth of wages, and a rise in the standards of living over time. An extremely low unemployment rate can however be a cautionary signal of an overheating economy, inflationary pressures, and tight conditions of businesses in need of additional workers.

As it is seen, the unemployment rate is one of the primary indicators in the economy that analysts use to gauge the health of an economy. It tends to fluctuate with the direction of the business cycle increasing in the period of recession and decreasing in the period of economic expansions. It is the most common indicator that policymakers, investors, and the general public look out for.

Analysts determine the unemployment rate both at the national level, state level, and regional level. International organizations like the International Monetary Fund, the Organization for Economic Co-operation and Development, and the World Bank also take their time to calculate, record and analyze the unemployment rates of countries throughout the world as a continuous process.

Central banks and policymakers consider the level at which the unemployment rate has increased in the period of a particular recession in order to gauge the impact the recession had on the economy. After making this analysis, they decide ways to adopt fiscal and monetary policies in order to reduce its adverse effects. Also, central banks try to forecast the trends of the unemployment rate in the future so that they can find long-term strategies to control it.

As of 2020, close to the end of the unemployment rate in Nigeria increased from 27.10 percent to 33.30 percent. More than half of the national population that make up the labor force is unemployed or underemployed.

Unemployment rate calculation

The level of a country’s unemployment is measured as a percentage of the labor force known as the unemployment rate. Because of this, economists and analysts can automatically account for the increases in population that can otherwise skew unemployment figures. It is measurable by dividing the number of unemployed people by the total number of people in the workforce. Unemployment is a vital instrument that indicates the economic status of a country. Measuring the unemployment rate requires the measurement of both employment and unemployment.

The figure tends to be the best-known measure of the labor market and certainly, the media and many countries make plenty of references to it. It is a very useful metric that measures the underutilization of the labor supply. It reflects how an economy is unable to generate employment for those people who want to work but do not have the privilege of doing so even though they are readily available for employment and are actively in search of a job. So financial institutions see the unemployment rate as an indicator of how effective and efficient an economy can absorb its labor force and the performance of the labor market.

Unemployment rate formula

The formula for calculating the unemployment rate is;

Unemployment rate = (Unemployed workers / Total workforce) x 100

Unemployment benefits

The term unemployment benefits also refer to unemployment insurance. It is a policy that provides an individual with temporary income when he loses his job due to factors that did not occur as a result of his fault. This money is a partial replacement of lost earnings and this helps one to pay expenses while looking for certain expenses while in search of new work. The benefits obtained from the taxes that a former employer paid are not based on financial needs. To get these benefits, the individual involved will have to request them, this request refers to unemployment claims.

Unemployment claims

This refers to the request for cash benefits which an individual makes after losing his job. The filing of these claims usually takes place through the state government where the claimant receives temporary payments. One major condition that accompanies the validation of this claim is that the claimant’s job loss did not occur as a result of his fault. The employee applies for these benefits after losing his job or for certain reasons like the event of a global pandemic. This loss of job must not be a result of the employee’s lapses. The unemployment claims come from the state funds which the government collects from employers in the form of an unemployment insurance tax. These claims are payable for only a limited period of time.

Limitations of the unemployment rate

Although the unemployment rate is the most informative indicator that reflects the general performance of the labor market and the economy at large, we cannot interpret it as a gauge for economic wellbeing or hardship. The figure simply reflects the percentage of those actively looking for a job but cannot find any but fails to give explanations with regard to the economic resources of the unemployed individuals and their family members. By implication, the unemployment rate cannot go beyond serving as a measurement of the utilization of the labor force and the failure to find a job. Other related measures will therefore be needful to evaluate economic wellbeing or hardship.

Another limitation of the unemployment rate is that it only provides information about the composition of the jobless population. It fails to provide information about the peculiarities of the education level in an economy, ethnic origin, socio-economic background, working experience, etc. of the unemployed.

Also, the unemployment rate fails to say anything about the type of unemployment whether it is structural or cyclical and whether it is long-term or short-term.

Frequently asked questions

Examples of different types of unemployment

  • Structural unemployment; occurs when there is no correlation between the set of skills of the workers and the jobs that are available.
  • Frictional unemployment; a situation whereby workers lose their current job and are actively in search of another one.
  • Voluntary unemployment; a worker chooses to remain unemployed for example if the job is not financially compelling.
  • Cyclical unemployment; results when a firm experiences a decrease in the demand for its products and services and its response is to reduce production and reduce the number of workers in the organization.
  • Regional unemployment; when structural unemployment affects a particular geographical area.
  • Classical unemployment; when wages become too high.
  • Seasonal unemployment; e.g the agricultural sector, crop production is subject to seasonal variations.
  • Causal unemployment; usually has to do with unskilled labor where the jobs are temporary in nature. For example, a restaurant employs waiters on a part-time basis during occasions.
  • Residual unemployment; has to do with all those that cannot work as a result of physical and mental disabilities.
  • Disguised unemployment; mismanagement of labor while carrying our production activities.
  • Chronic unemployment; usually common in developing countries, when unemployment becomes prolonged.
  • Institutional unemployment; when the government interferes with the free market forces.