Loading the player...

What is 'Unemployment Rate'

Unemployment rate is defined most basically as the percentage of the total labor force that is unemployed but actively seeking employment and willing to work.

BREAKING DOWN 'Unemployment Rate'

As defined by the International Labor Organization (ILO), an unemployed person is someone who is actively looking for work but does not have a job. The unemployment rate is a measure of the number of people who are both jobless and looking for a job. This measurement is considered a lagging indicator, confirming but not foreshadowing long-term market trends.

To be considered actively looking for a job a person must be in contact with employers, getting interviews, reaching out to government employment agencies, or simply sending out applications four weeks prior to polling or who are in college. Economists prefer this measure because it controls for increases or decreases in population. However, for the lay-person the unemployment rate should be considered as one measure among several to consult among many when trying to understand the number of jobless. 

Unemployment is measured in a number of ways in the U.S.: labor force sample surveys, Social Insurance statistics, which are numbers drawn from the number of people drawing unemployment benefits and other welfare programs, and employment office statistics which measure the number of people who come into unemployment offices looking for work. When calculating the official unemployment rate, the Bureau of Labor Statistics consider all the information gathered by these methods to provide a holistic picture of the labor market and the challenges facing workers. 

In particularly tough economic times, the unemployment rate may be lower than the number of people out of work because the official rate only includes those actively looking for work. Those workers who have become discouraged and dropped out of the labor force are not counted in unemployment statistics. For the same reason, men or women who do not work for an employer, but work fulltime at home raising children are not factored into the official unemployment number.

Finding the Unemployment Rate

In the United States, the Bureau of Labor Statistics conducts a monthly survey of roughly 50,000 households called the Current Population Survey (CPS), and uses the results they get from that survey to produce the number for the unemployment rate. Expressed as a percentage, the rate of unemployment is found by dividing the number of unemployed workers by the total labor force, and multiplying it by 100%.

From 1948 to 2004, the monthly U.S. unemployment rate has ranged between about 2.5% to 10.8%, averaging approximately 5.6%. That average is not a sign of consistent economic woes for the U.S. because some degree of unemployment, even in highly developed countries is to be expected. Unemployment also comes in different varieties, such as frictional and structural and seasonal. Agricultural jobs are often seasonal, so the seasonal unemployment rate often increases during winter months.

Frictional unemployment refers to the time and energy it takes to get a job that contributes to a person being unemployed for a moderate period of time, while structural unemployment refers to a mismatch in the supply and demand of labor, for example when there simply isn’t much of a demand for labor or when there is a dearth of skilled labor to be hired. 

Economists and policy makers get concerned when the unemployment rises above that of the natural unemployment rate, an estimate of what normal unemployment would be in comparison to a countries GDP when measured in the long run. 

RELATED TERMS
  1. Unemployment

    Unemployment occurs when a person who is actively searching for ...
  2. Continuing Claims

    Continuing claims refers to unemployed workers that qualify for ...
  3. Full Employment

    A situation in which all available labor resources are being ...
  4. Natural Unemployment

    The lowest rate of unemployment that an economy can sustain over ...
  5. Structural Unemployment

    A longer-lasting form of unemployment caused by fundamental shifts ...
  6. Concealed Unemployment

    When people who are out of work are not counted in official unemployment ...
Related Articles
  1. Personal Finance

    Understanding the Unemployment Rate

    The unemployment rate is the percentage of people in the labor force who are unemployed but seeking a job.
  2. Financial Advisor

    How Labor Force Participation Rate Affects U.S. Unemployment

    While a falling unemployment rate sounds like a good thing, it can actually be indicative of people leaving the labor force because they can't find a job.
  3. Insights

    How The Unemployment Rate Affects Everybody

    Depending on how it's measured, the unemployment rate is open to interpretation. Learn how to find the real rate.
  4. Personal Finance

    What "Unemployment" Really Means

    Unemployment occurs when a person who is actively searching for employment is unable to find work. The most frequently cited measure of unemployment is the unemployment rate. This is the number ...
  5. Insights

    Leading Economic Indicators: U.S. Bureau of Labor Monthly Stats

    The Bureau of Labor Statistics' monthly employment figures are a key economic indicator. Here's how they work.
  6. Personal Finance

    U.S. Labor Participation Rate at Record Lows

    In absolute terms, labor participation hit an all-time low.
  7. Personal Finance

    Understanding Natural Unemployment

    Natural unemployment is often defined as the lowest rate of unemployment an economy will reach.
  8. Personal Finance

    Understanding Frictional Unemployment

    Frictional unemployment is one aspect of natural unemployment, which is unemployment caused by things other than an underperforming economy.
  9. Insights

    The True Unemployment Rate: U6 Vs. U3

    Learn how to distinguish between the U-3 and U-6 unemployment rates, and explore which rate provides a truer picture of unemployment.
RELATED FAQS
  1. How does the U.S. Bureau of Labor Statistics calculate the unemployment rate published ...

    Understand the process used by the U.S. Bureau of Labor Statistics to determine the official unemployment rate for the United ... Read Answer >>
  2. How does the Bureau of Labor Statistics determine the unemployment rate?

    Learn how estimates of the unemployment rate are made based on monthly surveys of American households that are conducted ... Read Answer >>
  3. Do rising unemployment rates tend to increase or decrease investor sentiment and ...

    Discover whether rising unemployment rates tend to increase or decrease consumer confidence and investor sentiment. Unemployment ... Read Answer >>
  4. Is there a natural rate of cyclical unemployment?

    Learn more about cyclical unemployment and find out about the relationship of cyclical unemployment to the natural unemployment ... Read Answer >>
  5. Unemployment resulting from changes in the basic composition of the economy ... ...

    The correct answer is a. An example of structural unemployment is the technological revolution. Computers might have eliminated ... Read Answer >>
  6. What is the difference between frictional unemployment and structural unemployment?

    Learn about structural unemployment and frictional unemployment, the differences between the two types and their main characteristics. Read Answer >>
Trading Center