Question

How is the labor force defined, and who measures it? How is the unemployment rate calculated? Does an increase in the unemployment rate necessarily mean a decline in the size of the labor force? Why is a positive unemployment rate—more than zero percent—fully compatible with full employment?

Short answer

• The labor force is defined by individuals who are either working or willing to work provided they are capable of working.

The US Bureau of Labor Statistics measures the labor force.

• The below formula is used to calculate the unemployment rate:

$\mathrm{Unemployment}\mathrm{rate}=\frac{\mathrm{Unemployed}\mathrm{labor}}{\mathrm{Labor}\mathrm{force}}\times 100$

• No, an increase in the unemployment rate does not mean a decrease in labor force size.

• An economy is said to be fully employed when there is no cyclical unemployment. Frictional and structural unemployment is part of full employment. Therefore, a positive unemployment rate is fully compatible with full employment.

Step-by-step solution

Meaning and measurement of the labor force

The labor force constitutes all those people who are either employed or looking for employment and are employable.The term employable means attaining a legal age of working and not being institutionalized. Non- employable people and people who are not willing to work despite being employable are not included in the labor force.

The US Bureau of Labor Statistics keeps an account of the labor force in the US through a household survey throughout the country.

Calculating the unemployment rate

The US Bureau of Labor Statistics calculates the unemployment rate through the following formula:

$\mathrm{Unemployment}\mathrm{rate}=\frac{\mathrm{Unemployed}\mathrm{labor}}{\mathrm{Labor}\mathrm{force}}\times 100$

The unemployed labor includes those who are willing to work but are unemployed due to various reasons. This excludes people who do not meet standard requirements for a paid job.

Implications of increase in the unemployment rate

Reasons for an increase in the unemployment rate are given below:

• The size of the labor force is decreasing, and the percentage of unemployed people remains the same, or more people are losing jobs.

• Increase in the labor force due to the addition of more people in the pool of labor. For example, students are graduating and looking for jobs.

• More people from the existing labor force are losing jobs due to reasons like business cycles, structural changes, and others.

Thus, an increase in the unemployment rate doesn’t necessarily result from a shrinking labor force. A shrinking labor force can also lead to a higher employment rate (fewer resources).

Compatibility of positive unemployment rate with full employment

Frictional and structural unemployment always exist in any economy. It shows the changing economic performance of the country. People are constantly hired/fired or resign, after which they look for better opportunities; structural changes replace the old methods and skills, which make people lose their jobs. Thus, any economy can never be completely free of the two types of unemployment.

There is a continuous flow of people in and out of the employment pool. Therefore, the unemployment rate is always positive. An economy is said to be fully employed if there is no cyclical unemployment. In full employment, the number of unemployed people due to frictional and structural unemployment equals the number of vacancies available. Therefore, positive employment is fully compatible with full employment.