How the unemployment rate affects everyone

The national unemployment rate is defined as the percentage of unemployed workers in the total labor force. It is widely regarded as a key indicator of a country’s labor market performance. As an economic indicator that has received much attention, the unemployment rate has attracted the attention of many media, especially during economic recession and challenging economic times. This is because the unemployment rate does not only affect those who are unemployed-the level and persistence of unemployment factors have a wide-ranging impact on the entire economy.

Key points

  • The unemployment rate is the proportion of the unemployed in the labor force.
  • Unemployment will adversely affect the disposable income of the family, weaken purchasing power, reduce employee morale, and reduce economic output.
  • The Current Census Survey (CPS) assesses the degree of unemployment in the United States, and its measurement standards range from the most stringent U-1 measurement to the most comprehensive labor underutilization measurement U-6.
  • The current official measurement of unemployment in the United States is the U-3 measurement, which defines the unemployed as those who have no job, those who are actively looking for a job in the past 4 weeks, and those who have a job.

Why the unemployment rate is important

According to data from the US Bureau of Labor Statistics (BLS), when workers are unemployed, their families lose their wages, and the country as a whole loses its contribution to the economy in terms of goods or services that could have been produced.

Unemployed workers will also lose purchasing power, which may cause other workers to lose their jobs, which will have a knock-on effect that will affect the entire economy. In this way, unemployment will even affect those who are still working.

When companies try to cut costs, they usually use layoffs as one of the cost-saving measures. Those workers who stayed to do more work after the company dismissed some employees are unlikely to receive any additional compensation for their extra working hours.

Unemployment can also negatively affect the mental state of those who are still working. They may be more worried about losing their job or hesitant to find another job because they mistakenly believe that they are “lucky” to be hired. When their colleagues are unemployed, they may even feel guilty about having a job.

More broadly, the high unemployment rate is also a problem for the US economy. More than 70% of the products produced by the US economy are purchased by domestic consumers through personal consumption habits. The consumption of unemployed workers is much lower than that of workers with stable incomes because they have less disposable income.

In order to understand the causes and remedies of high unemployment, policymakers seek information on different aspects of unemployment. Statistics on the number of unemployed persons, unemployed hours, skill levels, unemployment trends, and regional unemployment differences are regularly provided to decision makers so that they can interpret the data and hope to make more informed decisions about guiding the economy and responding to unemployment.

Compile labor statistics

One misunderstanding of the unemployment rate is that it is based on the number of people applying for Unemployment Insurance (UI) benefits. But the number of applicants for unemployment benefits did not provide accurate information on the degree of unemployment. This is because people may still be unemployed after the benefits are used up, and applicants for other UI benefits may not be eligible for benefits, or may not even apply at all.

Tracking every unemployed person every month would also be very expensive, time-consuming and impractical. Therefore, the US government conducted a sample survey—the current population survey (CPS)—to measure the level of unemployment in the United States.

The United States has conducted CPS monthly since 1940. Approximately 60,000 households, or approximately 110,000 people, were selected to represent the entire U.S. population in the CPS sample survey. Typical households included in the sample survey were interviewed once a month for four consecutive months, and then interviewed again in the same four calendar months a year later.

The survey was conducted by trained and experienced Census Bureau staff. They interviewed people in 60,000 sample households to understand the labor activity or non-labor status of all household members during the survey base period (usually the week of the 12th of each month).

When using a sample survey, the estimated value of the sample may be different from the actual population value. According to data from the US Bureau of Labor Statistics, the probability that the sample’s monthly unemployment rate will change within +/- 110,000 is a number obtained from the entire census.

Employment and unemployment

The basic definition used by the BLS in compiling labor statistics is very simple:

  • People who have jobs are hired.
  • People who are unemployed, looking for work, and available for work are unemployed.
  • People who are neither employed nor unemployed are not part of the labor force.

The sum of employed and unemployed constitutes the labor force. The rest are people who don’t have a job and don’t want to find a job. These usually include students, retirees and housewives.

It should be noted that labor force indicators (such as the unemployment rate) are based on the U.S. non-institutional civilian population of 16 years and older. The labor measure does not include people under the age of 16, people confined in institutions such as nursing homes and prisons, and all members of the armed forces on active duty.

Although the basic principle for determining whether a person is employed is simple, in many cases it is difficult to determine the correct category of a person.

People are considered employed if they are engaged in any paid or profitable work during the survey week. If people do not have a job due to vacations, illness, doing some personal work, etc. during the survey week, they are also counted as employment.

People are classified as unemployed if they meet the following three criteria:

  • no job
  • Actively looking for work in the past four weeks
  • Currently working

The official unemployment rate widely cited by the US media and other news sources is based on the above definition of unemployment.

The criteria for being considered unemployed are strict and clear. For example, active job search includes measures such as contacting potential employers, participating in job interviews, visiting employment agencies, delivering resumes, and responding to job advertisements. Therefore, this does not include passive job search methods, such as attending training courses or browsing job advertisements in newspapers.

Therefore, the total number of unemployed includes those who lost their jobs, those who left their jobs to find other jobs, temporary workers who ended their jobs, those who were looking for their first job, and experienced workers who returned to work. labor force.

Unemployment measures

The official unemployment rate is often considered too strict to represent the true scope of labor market problems. Some analysts believe that the official unemployment measures are too broad, and they want a narrower target. However, they are in the minority. Those who think that the unemployment rate is too narrowly defined surpass this group.

In 1976, the Bureau of Labor Statistics, under the guidance of Commissioner Julius Shiskin, introduced a series of labor market measures called U-1 to U-7. In 1995, following the redesign of CPS the previous year, BLS introduced a series of new alternative measures for underutilization of labor. The periodic publication of these measures began with the employment report in February 1996.

These measures range from the most stringent U-1, which only includes people who have been unemployed for at least 15 weeks, to U-6, which is the broadest definition of labor underutilization. U-3 is the official unemployment rate. U-1 and U-2 are more restrictive and therefore lower than U-3, while U-4, U-5 and U-6 are higher than U-3.

U-6 measures

The U-6 metric provides the broadest measure of labor underutilization. The BLS defines it as “the total number of unemployed, plus all those who have a slight connection with the labor force, plus the total number of people engaged in part-time work for economic reasons, as a percentage of the civilian labor force plus all those who have a slight connection with the labor force.”

Marginal Attachment Workers are defined as people who are unemployed. They are not currently looking for a job (and therefore are not considered unemployed) but have shown a certain degree of attachment to labor. To be included in this category, individuals must indicate that they currently want a job, have looked for a job in the past 12 months, and are available for work.

A subset of marginal dependent groups are called discouraged workers. The discouraged workers are those who are not currently looking for work due to the following reasons:

  • They think there is no work within their scope of work
  • They have been unable to find a job
  • They lack the necessary education, skills or experience
  • They face some form of discrimination from their employer (for example, too young or too old)

The U-6 indicator is sometimes referred to as the “real” unemployment rate. Supporters of this measure claim that it represents the true nature of the unemployment problem because it also includes:

  • People who don’t have a job
  • Those who want to work but have not actively sought work in the past four weeks due to issues such as childcare, family obligations or other temporary issues
  • A frustrated worker who stopped looking for work because he thought it was useless
  • Underemployed people, including those who have jobs but work less hours than they want

Unemployment test

Consider the following hypothetical case as an example of how the official unemployment rate (U-3) underestimates the severity of the labor underutilization problem:

  1. Single mothers who have been unemployed for three months but have been unable to go to work to take care of sick children in the past two weeks will be classified as “not in the workforce.” She will be excluded from U-3 measures, but will be included in U-6 measures.
  2. A 60-year-old former executive who lost his job during a company restructuring a year ago is eager to return to the workplace. However, after sending more than 100 resumes in the first three months of unemployment, he was discouraged because he did not receive an interview call or confirmation letter; as a result, he stopped his job search. He will be excluded from U-3 measures, but will be included in U-6 measures.
  3. A sales executive who needed to support his family and pay bills was unable to find a full-time job after six months of unemployment. He finally signed a three-month contract and only needed to work 6 hours a week. Although the U-3 measure will consider his employment, the U-6 measure will consider his apparent degree of underemployment.

Bottom line

Although alternative measures of unemployment, such as the U-6 measure, exhibit very similar changes throughout the business cycle, they are very different in magnitude from the official unemployment rate. The official U-3 measure’s strict definition of unemployment may lead to an underestimation of the severity of actual unemployment.

Therefore, it is best not to read the headline U-3 Unemployed as it may not be able to convey the whole story. U-6 measures have the least restrictions and therefore the highest unemployment rate, which can more truly reflect the degree of underutilization of labor.


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