The BLS releases six measures of labor market slack in the monthly jobs report. In January, the broadest of these measures, U-6, stood at 11.1 percent, 4.8 percentage points higher than the official unemployment rate. Some economists have offered their own estimates of labor market slack trying to account for the misclassification and unusual movements in labor force participation during the pandemic.
What Is the Strict Definition of Unemployment?
Meanwhile, wage gains continued to outpace inflation — continuing a trend that has now taken hold for months — and more people rejoined the workforce last month, something reflected in an increased labor force participation rate. The unemployment rate is one of the most closely followed indicators used by businesses, investors, and others to gauge the state of the U.S. economy. Investor sentiment and consumer confidence have strong inverse relationships with the percentage of unemployed Americans.
Collecting Data
Structural unemployment can produce permanent disruptions due to fundamental and permanent changes that occur in the structure of the economy. They include technological changes, a lack of relevant skills, and jobs moving overseas to another country. Cyclical unemployment relates to the loss of jobs that occurs during changes in business cycles. 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. A low unemployment rate, on the other hand, means that the economy is more likely to be producing near its full capacity, maximizing output, driving wage growth, and raising living standards over time. Much of the increase in the unemployment measure was driven by temporary layoffs, while the BLS indicated that weather-related factors had temporarily increased the ranks of those who still hold jobs but were technically not at work during the month.
RELATED DATA AND CONTENT
- Therefore, some people argue the unemployment rate paints a brighter picture than reality.
- 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.
- It is among the indicators most commonly watched by policy makers, investors, and the general public.
- The unemployment definition doesn’t include people who leave the workforce for reasons such as retirement, higher education, and disability.
“What we need to see is strong private-sector labor market growth, and outside of health care, what we’ve seen instead is a very, very rapid deceleration that has shown no signs yet of stabilizing,” Pollak said. “Even a few months ago, the labor market seemed fine, the trajectory looked stable,” said Guy Berger, director of economic research at the Burning Glass Institute, a think tank. Yet outside of health care, construction and some transportation and warehousing roles, there was little meaningful job growth, with manufacturing adding just 1,000 to its payrolls and professional and business services positions declining by 1,000. “Oh dear, has the Fed made a policy mistake?” wrote Seema Shah, chief global strategist at Principal Asset Management based in the UK, in a note to clients following the jobs report’s release. “The labour market’s slowdown is now materialising with more clarity.” Policy makers and central banks consider how much the unemployment rate has increased during a particular recession to gauge the recession’s impact on the economy and to decide how to tailor fiscal and monetary policies to mitigate its adverse effects.
What is the payroll survey? And why is it likely to be less useful than usual?
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. Between 1931 and 1940, the unemployment rate remained above 14% but subsequently dropped down to the single digits. The U-3 unemployment rate in the United States was 4.3% for July 2024.
Key insights
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. 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. 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.
More broadly, high unemployment is also problematic for the U.S. economy. Unemployed workers consume far less than those with a steady income because they have less discretionary income. The U.S. government uses surveys, census counts, and the number of unemployment insurance claims to track unemployment.
The headline unemployment rate (known as U-3) measures the percentage of people over the age of 16 who aren’t working but are available and actively looking for work. When a sample survey is used, there is a chance that the sample estimates may differ from the actual population values. According to the BLS, there is a 90% chance that the monthly unemployment estimate change from the sample is within +/- 130,000 of the figure obtainable from a total census of the entire population. Many variations of the unemployment rate exist, with different definitions of who is an unemployed person and who is in the labor force.
Furman and Powell’s realistic unemployment rate differs from the official in two ways. First, they estimate the number of workers misclassified as being “not at work for other reasons” and count them as unemployed. Second, they try to estimate the excess decline in labor force participation beyond what would be expected given the rise in unemployment, and add those people to the unemployment rate as well.
“The demand for labor has softened substantially; [high] interest rates are having a real effect,” Pollak said. “They are causing businesses to forgo growth opportunities, something that’s causing consumers, especially low-end consumers, to pull back. We’re seeing a bifurcation in consumer behavior.” The Bureau of Labor Statistics reported Friday that the U.S. added 114,000 jobs, down from 206,000 in June and well short of expectations. Economists were expecting the unemployment rate to have been unchanged from June’s 4.1% reading. If, as a result of the pandemic, an unusually large number of firms are closing and few are opening, it seems possible that even the dramatic decline in employment that we are likely to see will underestimate the true extent of job loss.
Interviewers ask questions that determine employment status but do not ask whether respondents are employed or unemployed. Nor do the interviewers assign employment status; they record the answers for the BLS to analyze. Employment statistics are produced by the BLS, an agency within the Department of Labor (DOL). Every month the Census Bureau, part of the Department of Commerce (DOC), conducts the Current Population Survey (CPS) using a sample of approximately 60,000 households, or about 110,000 individuals.
In order to understand the causes and the remedy for high levels of unemployment, policymakers seek information on different aspects of unemployment. As a closely watched economic indicator, the unemployment rate attracts a lot of media attention, especially during recessions and challenging economic times. This is because the unemployment rate doesn’t just impact those individuals who are jobless; the level and persistence of the factors of unemployment have wide-ranging impacts across the broader economy. Structural unemployment comes about through a technological change in the structure of the economy in which labor markets operate. Technological changes can lead to unemployment among workers displaced from jobs that are no longer needed.
However, early in the pandemic, with stay-at-home orders in place and nonessential businesses closed in many communities, people who left employment were much less likely to seek work than would typically be the case. In addition, schools closed in many places, which meant that many people who lost their jobs had child-care responsibilities that prevented them from seeking or accepting a new job. Even now, nearly a year into the pandemic, many of these same dynamics are in place. The U.S. determines the unemployment rate by dividing the unemployed individuals by the total number of individuals in the labor force.
These households are selected using random sampling methods designed to generate as close an approximation as possible to the larger population. We know about these forecast errors because the BLS revises the data based on more complete information. In most years the benchmark is small, with the level of employment revising up or down by less than 0.2 percentage points. When people first file for unemployment insurance (UI), they are counted as an “initial claim.” So when unemployment increases, initial claims tend to rise. Because initial claims are reported weekly, they are often used as an early indicator of the overall unemployment rate.
By cutting interest rates, the central bank would reduce the cost of borrowing for goods and services, which would result in lower monthly payments for consumers and businesses alike who are subject to variable annual percentage rates. Investors and the general public use the unemployment rate to understand the state of a county’s economy and as a measure of how well the government is running the country. A high unemployment rate means that the economy is not able to generate enough jobs for people seeking work.
The U-6 measure provides the broadest measure of labor underutilization. The BLS defines it as the “total unemployed, plus all persons marginally attached to the labor force, plus total employed part-time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force.” In the U.S., the most commonly cited national unemployment rate is the U-3, which the BLS releases as part of its monthly employment situation report. It defines unemployed people as those willing and available to work and who have actively sought work within the past four weeks. Many people who become unemployed do not apply for UI benefits, either because they are not eligible or because they choose not to apply. So initial claims typically understate the number of people becoming unemployed in a given week.
The survey excludes individuals under the age of 16 and those who are in the Armed Forces. People in correctional facilities, mental healthcare facilities, and similar institutions are also excluded. Although the U.S. government began tracking unemployment in the 1940s, the highest rate of unemployment to date occurred during the Great Depression, when unemployment rose to 24.9% in 1933. High, persistent unemployment can signal serious distress in an economy and even lead to social and political upheaval. The most important key figures provide you with a compact summary of the topic of “Unemployment in the U.S.” and take you straight to the corresponding statistics. The Fed therefore believes it can put a floor underneath the labor market that prevents it from deteriorating further, Berger said.