Why unemployment is important

The unemployment rate is a lagging indicator. This means it measures the effect of economic events, such as a recession. The unemployment rate doesn't rise until after a recession has already started. It also means the unemployment rate will continue to rise even after the economy has started to recover. Why is that? Employers are reluctant to lay people off when the economy turns bad. For large companies, it can take months to put together a layoff plan. Companies are even more reluctant to hire new workers until they are sure the economy are well into the expansion phase of the business cycle.

During the financial crisis, the recession actually started in the first quarter of , when GDP fell 1. The unemployment rate didn't reach 5. It reached a peak of In the recession, unemployment went from 5. For that reason, the unemployment rate is a powerful confirmation of what the other indicators are already showing.

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.

See how this worked in U. S Unemployment Rate by Year. The unemployment rate is an important indicator the Federal Reserve uses to determine the health of the economy when setting monetary policy. Investors also use current unemployment statistics to look at which sectors are losing jobs faster.

They can then determine which sector-specific mutual funds to sell. While the unemployment rate is an important economic indicator, it doesn't capture the full scope of unemployment and underemployment.

Former Fed Chair Janet Yellen noted the disparity between real unemployment and the unemployment rate in when she said, "A broader measure of unemployment isn't quite back to its pre-recession level. It includes people who would like a job but have been too discouraged to look for one and people who are working part-time but would rather be working full-time.

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. The year-over-year unemployment rate will tell you if unemployment is worsening. If more people are looking for work, less people will be buying, and the retail sector will decline. Also, if you are unemployed yourself, it will tell you how much competition you have, and how much leverage you might have in negotiating for a new position. Unemployment can also have a negative effect on the mental state of those who are still employed.

They may become more concerned about losing their jobs or be hesitant to search for other employment because they have a false belief that they "are lucky" to be employed at all. They may even feel guilty about having a job when their co-workers are out of work. More broadly, high unemployment is also problematic for the U. Unemployed workers consume far less than those with a steady income because they have less discretionary income.

In order to understand the causes and the remedy for high levels of unemployment, policymakers seek information on different aspects of unemployment. Statistics about the number of unemployed people, the period for which they have been unemployed, their skill levels, the trend in unemployment, and regional disparities in unemployment are periodically made available for policymakers so that they can interpret them and hopefully make better-informed decisions about steering the economy and countering unemployment.

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.

Tracking every unemployed person monthly would also be very expensive, time-consuming, and impractical. Therefore, the U. The U. About 60, households, or approximately , individuals, are in the CPS sample survey, selected to be representative of the entire U. A typical household included in the sample survey is interviewed monthly for four consecutive months and then again for the same four calendar months a year later.

The survey is carried out by trained and experienced Census Bureau employees. They interview persons in the 60, sample households for information on both the labor force activities or non-labor force status of all of their household members during the survey reference period generally the week that includes the twelfth of the month. When a sample survey is used, there is a chance that the sample estimates may differ from the actual population values. The basic definitions used by the BLS in compiling labor statistics are quite straightforward:.

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. These typically include students, retirees, and homemakers. It's important to note that labor force measures, such as the unemployment rate, are based on the civilian non-institutional U.

Labor force measures exclude persons who are below age 16, people confined to institutions—such as nursing homes and prisons—and all personnel on active duty in the Armed Forces.

While the basic tenets that determine whether or not an individual is employed are simple, there are numerous situations that can make it difficult to ascertain the correct category to which a person belongs.

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. People are classified as unemployed if they fulfill the following three criteria:. The official unemployment rate that is widely quoted in the media and other news sources in the U.

The criteria for being considered unemployed are rigorous and well-defined. For example, actively looking for work includes measures such as contacting prospective employers, attending job interviews, visiting an employment agency, sending out resumes, and responding to job advertisements. Therefore, this excludes passive methods of job search, such as attending a training course or scanning the job advertisements in newspapers.

As such, the total unemployment figure includes people who have lost their jobs, as well as persons who have left their jobs to look for other employment, temporary workers whose jobs have ended, individuals looking for their first jobs, and experienced workers returning to the labor force. The official unemployment rate has often been cited as being too restrictive and not representative of the true breadth of labor market problems. Some analysts contend that the official unemployment measure is too broad, and they 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. In , 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 February Employment Situation report. The measures range from U-1, which is the most restrictive since it only includes those people who were jobless for at least 15 weeks, to U-6, the broadest definition of labor underutilization.

The U-3 measure is the official unemployment rate. 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.

Marginally attached workers are defined as persons without jobs who are not currently looking for work and hence not considered unemployed , but who have demonstrated some degree of labor force attachment. To be included in this category, individuals must indicate they currently want a job, have looked for work in the last 12 months, and are available for work. Yet once these benefits expired, households suffered a second blow to income of 13 percent, with nearly no additional support from other social safety net programs.

The remaining social safety net replaced only a small share of the lost unemployment benefits. See Figure 1. Figure 1. The Supplemental Nutrition Assistance Program, for example, made up for only about 2 percent of pre-job loss income in households that tapped unemployment insurance and then about the same 2 percent after they lost unemployment insurance benefits.

But given the evidence that more than half of American families could not replace a month of their income with liquid savings and that one-third have no savings at all, it is difficult to see how households would be able to maintain their standards of living.

The bright side of these findings is that unemployment insurance does its job: partially insuring against large income declines after a job loss. But once an unemployed worker is no longer eligible for the program, the rest of the social insurance system does little to support those households.

Other new research shows the significant decline in income and spending that happens after unemployment benefits are exhausted. If policymakers want to ensure that U.

Explore the Equitable Growth network of experts around the country and get answers to today's most pressing questions! The importance of unemployment benefits for protecting against income drops.