Definition, Analysis, How It’s Calculated

  • The unemployment rate is a percentage of the labor force that is unemployed, released on the first Friday of every month.
  • A healthy economy maintains an unemployment rate that hovers between 3% and 5%.
  • The Bureau of Labor Statistics maintains six different unemployment rates which have separate definitions of unemployment.

Not all unemployment is created equal in the eyes of a country’s government.

Seasonal unemployment occurs when a particular industry goes dark during a period throughout the year, like tour guides during the tourist season. Frictional unemployment describes the period of unemployment that occurs when someone is in-between jobs. Structural unemployment describes an imbalance between the skills demanded in the job market and the skills that the labor force has.

Governments, for the most part, are unconcerned with these forms of unemployment. Their main concern is cyclical unemployment, the unemployment caused by ups and downs in the wider economy. Governments can keep their finger on the pulse of the economy by keeping track of the unemployment rate.

What is the unemployment rate?

The unemployment rate is expressed as a percentage of the labor force that is unemployed. It’s released on a monthly basis by the Bureau of Labor Statistics, usually on the first Friday of every month. As of May 2022, the unemployment rate is at 3.6%, unchanged since March.

The unemployment rate is used as a measure of the economy’s health. Specifically, it is a key determinant when the National Bureau of Economic Research (NBER) announces the economy is in recession. In addition to the unemployment rate, the NBER also looks at real Gross Domestic Product (GDP), real income, consumer spending, industrial production, and retail sales — all of which are closely intertwined.

For example, if GDP starts falling, companies might halt production as a precautionary measure, which means they’re also cutting back on staff. As a result, unemployment would rise, which would mean less consumer spending because their source of income is suddenly uncertain. While each factor is tied to the others, Dr. Nicole Bissessar, a professor of economics at Southern New Hampshire University says “the unemployment rate is always the first thing that you notice when the economy is on its way down.”

Other effects of the unemployment rate

In addition to the economy’s health, the unemployment rate has other ramifications, including a positive correlation with the crime rate. Additionally, unemployment usually creates unhappy voters. “It’s never a good strategy for a politician to be in office, and it doesn’t matter which country, and there’s tons of unemployment,” Bissessar says. “He will not be liked. He will probably not get a next term.”

In the US, a healthy unemployment rate can range between 3% to 5%, though this varies from country to country. An unemployment rate that exists outside these bounds is problematic for the economy, as outlined by two economic theories: Okun’s law and the Phillips curve:

Okun’s Law: Okun’s Law describes a 1:2 inverse ratio between unemployment and GDP. For every percentage point that the unemployment rate rises, GDP falls by 2%. The lower the unemployment rate, the higher the GDP.

That also works the other way around. If the unemployment rate dips too low, GDP growth can grow unsustainably. “When the economy overheats, we tend to fall into what we call an inflationary gap,” Bissessar says, which is a gap caused when the measured GDP is higher than the theoretical GDP when unemployment is at a natural rate. Higher wages means higher

Phillips Curve: The Phillips Curve describes a similar relationship between the unemployment rate and inflation, though on an exponential decay curve. So as the unemployment rate increases, inflation decreases, though at a declining rate. On the other hand, as the unemployment rate approaches zero, inflation increases exponentially.

How to calculate the unemployment rate

The unemployment rate is calculated monthly by the Census Bureau through the Current Population Survey. It surveyed 60,000 households across the country, approximately 110,000 individuals by their estimates. Each month, a quarter of the surveyed households are switched out.

Of these households surveyed, the unemployment rate is derived by dividing the number of people who are unemployed by the labor force. However, there are particularities in who is counted in these two numbers.

On the side of the labor force, the Census Bureau only includes non-institutional civilian adults. Breaking this down, those included in the labor force must be adults (16 and up), non-military personnel who aren’t institutionalized, either in a correctional facility, in a mental health institution, or under nursing care. The labor force also excludes people who are taking care of family members, full-time students, and those who aren’t actively seeking employment.

The definition of unemployment used in the official unemployment rate only includes people actively who have searched for a job in the last four weeks. This definition misses out on other aspects of employment. For example, workers who took part-time jobs or temporary jobs because they couldn’t find full-time employment are counted as employed.

As a result of these inclusions, the official unemployment rate, while perhaps useful when trying to determine if there’s a


recession

, doesn’t fully capture the entire picture of employment in the country. However, the BLS actually keeps track of unemployment through six different surveys, each setting different standards for what it means to be unemployed, labeled U-1 through U-6.

Alternative unemployment rates:

Each of the six unemployment rates defines unemployment differently. The unemployment rate that’s most cited is U-3, which only counts people who are actively seeking employment as unemployed. However, U-6, which uses the widest definition of unemployment, is considered the “real unemployment rate.”

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