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.