In good times and in bad we hear about the unemployment rate in the news media. That’s because understanding current employment levels and trends is one of the keys to predicting where the economy is headed.
The employment rate in a prosperous economy is typically very high, meaning that the vast majority of workers who want jobs are able to find them. The unemployment rate and fluctuations in that rate are used in the analysis of the relative health of an economy.
The Bureau of Labor Statistics (BLS), a division of the U.S. Department of Labor, measures the unemployment level in the economy and releases the results monthly. Their survey of 60,000 U.S. households is called the Current Population Survey and labels each surveyed adult aged sixteen or older as one of the following:
- Employed - individuals who labored in any way as a paid worker during previous week, even just a little bit
- Unemployed - individuals actively looking for a job or who have been laid off temporarily (perhaps expecting to return to the job, but not having worked at all during the previous week)
- Not in the labor force – everyone else, including everyone who did not work for a wage during the previous week (students, homemakers, retired persons)
The labor force is simply the number of unemployed persons plus the number of employed persons, and the unemployment rate is the ratio of the unemployed to the labor force.
For example, if there were 96 employed persons, and 4 unemployed persons, then the labor force would be 100, and the unemployment rate would be calculated as follows:
unemployment rate = unemployed ÷ labor force = 4 ÷ 100 = .04 = 4%
Another way to think about it is that the unemployment rate reflects the number of people who would prefer to be working but are not. A point of confusion for many people is the notion that everyone who is not working is unemployed, when actually just the people who are looking for a job or who have been temporarily laid off are unemployed. The rest of the people who are not working, basically by choice, are not considered to be in the labor force at all. The unemployment rate only takes into consideration the people who want to work, but who cannot find a job or have been temporarily laid off.
In a perfect world, and a market where labor supply and demand are completely in balance, the entire labor force would remain fully employed. In the real world, however, many circumstances conspire to insure that even in the healthiest economy some people who want to work will be unemployed.
This is the natural rate of unemployment – the unemployment level in an economy that does not ever go away. Some of this unavoidable unemployment is caused by frictional unemployment - unemployment that results from the time it takes for unemployed workers to search for and find new jobs for which they are well-suited. And some of it is caused by structural unemployment – unemployment that occurs when there simply are not as many jobs as people who want to work. Although the unemployment rate will fluctuate mildly from year to year, and radically in times of great economic calamity, it generally stays at about the same level over longer periods of time.