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Just Explain It: Making Sense of the Unemployment Rate

Matt Nesto

On Friday we'll see if the November unemployment numbers continue to show an accelerating economy, or one that's sputtering.

In October the economy added 171,000 jobs. That's more than previous estimates, but at the same time the unemployment rate ticked up a bit to 7.9%.

Which brings us to the topic of today's Just Explain It.

The monthly unemployment report: What does it measure AND how does the government calculate it? How can we add jobs and at the same time see the unemployment rate goes up? What is the "real unemployment rate"? And, can you believe the numbers?

Related links: Unemployment Benefits, Payroll Tax Cut Really at Risk of Going Over the Cliff

Here are the basics…

On the first Friday of each month, the U-S Bureau of Labor Statistics releases its job assessment. The report contains employment data from the previous month and is made up of two figures: the unemployment rate and the total nonfarm payrolls - which is just that, all jobs outside the farming industry that were added the previous month.

The government determines these figures by collecting information from a large sampling of individual households and employers.

To find out who's working and who's not, two things happen. First, the Census Bureau surveys about 60,000 households…and only questions about employment are asked. This is what's called the household survey.

At the same time, the Bureau of Labor Statistics checks in with nearly half a million worksites. They gather the information on how many employees were on the payroll the month before.

Then the independently collected numbers are compiled using a method the Labor Department has applied for decades. That's how the unemployment rate is calculated.

So how did the unemployment rate go up when more jobs were added? The unemployment rate inched up to 7.9% because not all those joining the workforce found work.

That brings us to what's called the "real unemployment rate."

Unlike the headline figure, the "real rate" is the broadest measure of U.S. unemployment. It takes into account workers who have given up looking for work, as well as those who are part-time, but would like a full-time job.

In October, households indicated that the "real unemployment rate" was 14.6%. That's down one tenth of a percent from September.

And finally, as to the trustworthiness of the data, there is nothing to worry about. The Bureau of Labor Statistics collects and assesses all its data independent of the White House and Congress.

Related link: Why the Fiscal Cliff May Trigger a Recession

However, sometimes the jobs data is gathered by unreliable surveys and has to be revised. The best way to judge the state of employment in America, is to focus on the general trend — not just a single month's report.

Did you learn something? Do you have a topic you'd like explained? Give us your feedback in the comments below or on twitter using #justexplainit.