The unemployment rate is calculated by dividing the number of unemployed people in a country by its total available labor force. The number of individuals who are considered to be unemployed must meet the criteria described above, and be unemployed due to cyclical, structural, or frictional factors. The equation to calculate the unemployment rate is:
The unemployment rate, however, comes with a few shortcomings and there are debates ongoing about who should be counted as “unemployed.” For instance, there are debates over whether those employed on a part-time basis should be included in the calculation. Arguments for the inclusion of said group state that such individuals are technically unemployed, and should be included if they meet the criteria listed above. Those against state that part-time employment opportunities usually face very high turnover rates and thus are not a dependable source of long-term employment.
Another point of contention for using the unemployment rate is that of discouraged workers. This category refers to workers who are out of a job and are unable to find suitable employment due to cyclical or structural factors. As a result, the group becomes very demotivated and ceases to look for employment, which artificially inflates the unemployed count. Since the size of the group varies quite significantly, reliable figures are difficult to generate and it is difficult to exclude the group from the unemployment calculation.
Nonetheless, it is generally agreed upon that a high unemployment rate is a signal of economic recession, whereas a lower unemployment rate generally signifies prosperous economic conditions. However, unemployment does experience a time-lag, meaning that changes in the economic state take time to be reflected in the indicator.
The employment-to-population ratio (EP Ratio) measures the degree of participation that working-age civilians have in the labor market. According to the International Labor Organization, a civilian between the ages of 16 to 64 years old is considered to be of working age. The ratio can be calculated using the following formula:
EP ratios can also be calculated for specific age ranges in order to quantify the productivity of certain age brackets. For example, an EP ratio for civilians aged 16 to 25 years old would measure how much participation new workers have in the labor market.
Labor force participation rate
The labor force participation rate (LFP rate) is used to measure the degree of participation that the labor force has in a given economy. The LFP rate can be calculated using the following equation:
Where the “total potential labor force” includes all civilians who have opted out of the labor force due to: