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Unemployment Rate: Definition, Effect, Trends

what is the unemployment rate definition

A low unemployment rate represents a strong economy while a high unemployment rate represents a weak economy. Frictional unemployment is a natural result of the fact that market processes take time and information can be costly. Searching for a new job, recruiting new workers, and matching the right workers to the right jobs all take time and effort.

what is the unemployment rate definition

As of Dec. 2023, the U-3 unemployment rate in the United States was recorded at 3.7%, just in line with the pre-pandemic unemployment rate. Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism. She has worked in multiple cities covering breaking news, politics, education, and more. Her expertise is in personal finance and investing, and real estate. South Africa has the highest unemployment rate in the world, with unemployment at 33.5% as of 2022. Estimates for 2023 also place it in the first position, with an estimated unemployment rate of 34.7%.

Some people are not working because they are rearing children, ill, on vacation, or on parental leave. The U.S. Census conducts a monthly survey called the Current Population Survey (CPS) on behalf of the Bureau of Labor Statistics (BLS) to produce the primary estimate of the nation’s unemployment rate. The unemployment definition doesn’t include people who leave the workforce for reasons such as retirement, higher education, and disability. Many governments offer unemployment insurance to certain unemployed individuals who meet eligibility requirements.

It defines unemployed people as those who are willing and available to work and who have actively sought work within the past four weeks. The unemployment rate is the percentage of the labor force without a job. It is a lagging indicator, meaning that it generally rises or falls in the wake of changing economic conditions, rather than anticipating them.

Euro Area: Unemployment rate dips in January

Cyclical unemployment is the variation in the number of unemployed workers over the course of economic upturns and downturns, such as those related to changes in oil prices. Unemployment rises during recessionary periods and declines during periods of economic growth. In response to pandemic-related closures or business cutbacks, unemployment in the United States achieved historic records. In May 2020, 49.8 million individuals reported they had been unable to work at some point in the prior four weeks because their employer closed or lost business due to the pandemic.

  1. Unemployed people, plus discouraged workers, as a percent of the labor force (plus discouraged workers) make up the U-4 unemployment rate, which was 3.9% as of Dec. 2023.
  2. Structural unemployment can produce permanent disruptions due to fundamental and permanent changes that occur in the structure of the economy.
  3. As a closely watched economic indicator, the unemployment rate attracts a lot of media attention, especially during recessions and challenging economic times.

Bureau of Labor Statistics (BLS), when workers are unemployed, their families lose wages, and the nation as a whole loses its contribution to the economy in terms of the goods or services that could have been produced. These include recessions, depressions, technological improvements, job outsourcing, and voluntarily leaving one job to find another. In the United States, the government uses surveys, census counts, and the number of unemployment insurance claims to track unemployment.

Understanding the Unemployment Rate

If you went to college and received a degree, but haven’t been able to land a job in your desired field, this could be an example of underemployment. An economics major, for instance, would be underemployed if they took a part-time job washing dishes as they continued to search for an economics job. However, this person wouldn’t be included in the unemployment rate.

what is the unemployment rate definition

In addition, central banks carefully try to predict the future trend of the unemployment rate to devise long-term strategies to lower it. The unemployment rate is the current portion of the labor force that is without work. The Bureau of Labor Statistics maintains historical unemployment data going back to 1948. The official unemployment rate that is widely quoted in the media and other news sources in the U.S. is based on the above definition of unemployment. How do economists arrive at the percentages in and out of the labor force and the unemployment rate? Unemployment is when an individual who is not employed and is seeking employment, cannot find work.

The unemployment rate increased from 4.4% in March 2020 to 14.8% in April 2020, achieving levels not seen since the 1930s. Those who feel unable to find work due to discrimination also fall under this category. Note that the denominator—normally the labor force—is adjusted to include discouraged workers, who are not technically part of the labor force. When the unemployment rate reaches 6% to 7%, as it did in 2008, the government gets concerned and tries to create jobs through stimulating the economy. It may also extend unemployment benefits to prevent the recession from deepening. Studies show that extended unemployment benefits are the best way to boost the economy.

For current employment statistics, see Employment Statistics. It is thus advisable to look beyond the headline U-3 unemployment number as it may not convey the whole story. The U-6 measure, by being the least restrictive and therefore the highest unemployment rate, may provide a truer picture of the degree of labor underutilization.

People are considered employed if they did any work for pay or profit during the survey week. People are also counted as employed if they have a job at which they did not work during the survey week, for reasons such as being on vacation, falling ill, doing some personal work, etc. One misconception about the unemployment rate is that it is derived from the number of people filing claims for unemployment insurance (UI) benefits. But the number of UI claimants does not provide accurate information on the extent of unemployment. This is because people may still be jobless after their benefits run out, while other applicants for UI benefits may not be eligible for benefits or may not even have applied for them. Many full-time college students have only a part-time job, or no job at all, but it seems inappropriate to count them as suffering the pains of unemployment.

How Does the U.S. Bureau of Labor Statistics Collect the U.S. Unemployment Data?

When companies are trying to cut costs, they often reduce their workforce as one of their cost-saving measures. Those workers who are left to do more work after a company lays off part of their staff are not likely to receive any additional compensation for the extra hours they are working. The Bureau of Labor Statistics tracks and reports all data related to unemployment. Between 1931 and 1940, the unemployment rate remained above 14% but subsequently dropped down to the single digits. Interviewers ask a series of questions that determine employment status but do not ask whether respondents are employed or unemployed. Nor do the interviewers themselves assign employment status; they record the answers for the BLS to analyze.

Users can generate and download tables showing any of the labor market measures named above for a specified date range. While alternative measures of unemployment, such as the U-6 measure, show very similar movements throughout the business cycle, they differ significantly in magnitude from the official unemployment rate. The strict definition of unemployment under the official U-3 measure may result in understating the magnitude of the actual unemployment situation. Other methods can include expanding apprenticeship programs, providing businesses with tax credits or incentives to increase hiring, providing more assistance to the self-employed, and improving education. The official unemployment rate has often been cited as being too restrictive and not representative of the true breadth of labor market problems.

For example, if the other indicators show an expanding economy, and the unemployment rate is declining, then you know for sure businesses are confident enough to start hiring again. In 1976, the BLS, under the direction of Commissioner Julius Shiskin, introduced a range of labor market measures, entitled U-1 through U-7. In 1995, following the redesign of the CPS in the previous year, the BLS introduced a new range of alternative measures of labor underutilization. Regular publication of these measures commenced with the Feb. 1996 Employment Situation report.

Some analysts contend that the official unemployment measure is too broad and would like a more narrowly targeted measure; however, they are the minority. This group is outnumbered by those who believe the unemployment rate is too narrowly defined. The sum of employed and unemployed people makes up the labor force. The remainder consists of people who have no jobs and are not looking for any. The survey is carried out by trained and experienced Census Bureau employees.